Beware of Stop Losses

It continues to be a rollercoaster ride on the markets. Is there any chance we could have a quiet peaceful summer? Probably not!

In this environment, it does seem wise to have stops in place that are activated by your broker or spread betting firm - but you have to be careful where you set them. If you set them too close to your entry point, you could end up being closed out just as the share concerned is about to spike back up.

One of my website readers lost a lot of money on airports operator BAA last week. He got stopped out of his trade when the market price had reached his stop loss for just ten seconds - losing him a lot of money. And, of course, sod's law dictates - BAA not only went up but rocketed higher. Without that stop in place, he would have actually made a very good profit.

My view is make sure your stop is placed at least 12% lower than your entry point, otherwise you could end up being one of those stories when you got stopped out on a minor spike down.

"I'm afraid my stop also caused me to lose most of my trading money," he e-mailed me ruefully.

And that's another point; never put all your eggs in one basket. My reader, of course, was excited about BAA because of a possible bid. The price went down when the bid looked less certain and rocketed up again when a bid was more likely again. If he had held BAA as part of a balanced portfolio then his would not have lost so much of his trading capital.

So to sum up: in these volatile times stops can save you from a sudden market crash. But do not set them too close! And remember, when setting stops with spread betting firms, only a guaranteed stop will get you out at the exact price of your stop loss. You must use the word "guaranteed".

My portfolio isn't faring too badly despite the volatility. My strongest companies are holding up well and these include Carphone Warehouse, Creston and Wolfson.

A word of comfort to those holding shares during this turbulence: it is not 1999 when shares were obviously overvalued. Those sticking with good companies should end up OK.

Good luck to all during these difficult times and whatever decisions you make, I hope they prove the right ones!