Capital and Stop Loss

Introduction

Gann said that the first thing to remember before applying any rule is to always use a stop-loss order to protect your capital. He repeated this idea more than any other in his course. He believed that thousands of people went broke trying to hold on until the trend turned in their favour.

Gann's Capital Rule

Gann said: divide your capital into 10 equal parts and never risk more than 10% of your capital on any one trade. If you lose three trades in a row, reduce your trading size and risk only 10% of the remaining capital.

With this rule, the market would have to beat you 10 times in a row to wipe out your capital, which is very unlikely if you follow the rules.

Modern Adjustment

Many traders today risk even less, around 1% to 2% per trade, especially in volatile markets. You can use Gann's 10% rule as the maximum limit and a smaller percentage for daily trading.

Example in Rupees

Your trading capital is Rs 2,00,000.

• Gann's maximum risk per trade: 10% = Rs 20,000.
• Safer modern risk: 2% = Rs 4,000.
• You want to buy Infosys (illustrative) at Rs 1,500 with a stop-loss at Rs 1,460. Risk = Rs 40 per share.
• Quantity with 2% risk: 4,000 / 40 = 100 shares.

Why Stop-Loss Matters

• A small loss or several small losses can be recovered with one good profit.
• A large loss is very hard to recover. A 50% loss needs a 100% gain to break even.
• Gann said: when you are out of the market, the only thing you can lose is an opportunity. When you are in with a big loss, you can lose your capital.

Where Gann Placed Stop-Losses

• Just below a double or triple bottom when buying.
• Just above a double or triple top when selling.
• Below an important resistance level, such as the halfway point of a range.
• Gann used about 1 to 3 points in the US stocks of his time. For Indian stocks, convert this into a small percentage or a small buffer below the level, for example Rs 5 to Rs 20 below support depending on the stock price.

Protecting Profits

Gann said that once you make profits, those profits become your capital and must also be protected. Move your stop-loss up as the price rises.

Example: You buy HDFC Bank (illustrative) at Rs 1,650 with a stop at Rs 1,615. It rises to Rs 1,720. Move your stop to Rs 1,665. It rises to Rs 1,780. Move the stop to Rs 1,730. Your profit is now protected.

Never Average a Loss

Gann called averaging down the surest way to lose your capital. If you bought a stock and it is showing a loss, the trend is against you. Buying more only increases the loss. Add to positions only when the trade is in profit.

Protect Your Capital on GoPocket

On the GoPocket app, place a stop-loss order (SL or SL-M) immediately after your buy order is executed. For intraday trades, use a Cover Order, which comes with a compulsory stop-loss. For swing trades, remember that regular stop-loss orders are day orders, so place them again each day, for example as an AMO.

Frequently Asked Questions

Is 10% risk per trade safe?

It was Gann's maximum. Many traders use 1% to 2% for more safety.

Should I remove my stop-loss if the price comes close?

Never. That is exactly when the stop-loss protects you.

Key Takeaways

• Divide capital into 10 parts; never risk more than one part on a trade.
• Place the stop-loss when you enter, not later.
• Never average a losing trade.

Disclaimer: Illustrative prices only. Investments in the securities market are subject to market risks.