Editorial Contributor
Robbie Burns AKA The Naked Trader - ‘Movember’ Diary My goodness, I had a revelation yesterday. Nope, I haven’t found God; I remain Atheist-lite (‘lite’ just in case). I was sitting doing a seminar with a lovely bunch of people and we were discussing stop losses. A few stories came up the same way. A share was bought, the stop loss set at anything from 10 to 20% away from the entry price. Yup, you guessed it, the stop was then hit and the loss taken. This was either a good or a bad move depending on whether the share moved further down or bounced back.
In other words, traders shouldn’t be afraid of saying to themselves, “I made this buy at just the wrong time, I should admit that and exit fast. I got it wrong for now.” They shouldn’t say, “Never mind, I’ll just let the stop loss take me out if it has to and wait for it to bounce back.” Let me give you an example. I made, in hindsight, a terrible trade buying SDL at around 575 — it had fallen from the mid 600s and I thought the sell-off overdone and I was being a clever so and so by spotting it.
That is when the revelation hit me.
However, I was in reality making a bum trade.
A stop loss is just a last line of defence against a stinker. You don’t have to wait for a share to get to the stop loss before getting rid of it.
Now many would have put in a stop loss here of say 10-15%, say somewhere between 500 and 525. Which you could argue is reasonable. However, I decided quickly I had a made a terrible mistake and I came out fast as it sank further, getting out around 560 for a small loss. If I had held on and let a stop take me out at say 520, I would have lost a whole lot more.
What we shouldn’t be doing is getting an entry point, setting a stop loss and then letting it stop out or not whatever happens. That is crazy in the end. We need to just change our minds if we think we got it wrong. So, when getting an entry point on an initial trade, if the price starts to slip, don’t necessarily wait for the stop loss — get the hell out with very minimal damage much earlier on — then try and get another better entry point. Similar stories came up. “I bought this share at a fiver, I set my stop at 420p and it got sold at a loss, how could I have prevented it?” Well, early on in any trade I think you should monitor it really closely. The share was bought at a fiver. The market generally falls and the share falls to 490. How’s about getting out there and taking a tiny loss fast?
“A stop loss is just a last line of defence against a stinker. You don’t have to wait for a share to get to the stop loss before getting rid of it.”
70 | www.financial-spread-betting.com | December 2012