Getting Spiked Out
I'm getting quite a few e-mails from people who keep losing money and they
blame it on stop losses.
"The share goes down to the stop loss, I get closed out and then it goes
right back up again," they wail.
On investigating further nearly every time this trade was done on a
spreadbet. The spreadbetting firm closes the bet the moment the price reaches the
stop loss even for a second.
Which is fair enough. People tend to blame the spreadbetting company
involved but I don't think that's fair. After all, if they hadn't got you out and
the share kept falling you wouldn't be happy would you?
And looking into it even more the problem seems to be where the stop loss is
set - and most of those moaning seem to be setting their stops too close to
their entry point.
If I was going long on a share at 500p I would not be setting a stop loss at
470! I would give it much more leeway.
And I would look at the chart. Where was the last support level? If on the
above example the last support was 460, set the stop loss under that, and also
under a whole number, so say 447.
Another point to make is, as long as you're reasonably near a screen for
most of the day, perhaps it's best not to set an automatic stop loss order but
in fact use your own judgement.
So for example I would write down my stop - if the share in question reached
it I could then use advfn level 2 to see for myself whether it was just a
quick spike down rather than let the spreadfirm take me out.
Do remember the market is a ruthless place. Market makers and other
participants will have a pretty good idea where stops are and the best way for them
to pick up cheap shares is to push the price down to stop loss areas to
encourage forced sellers.
One thing to remember about stops, particularly with brokers is, watch for
ex dividend days.
Remember if a stock you are in goes ex for 20p it will start the day 20p
lower - ensure your stop is changed before the day itself if you own the share
The current volatile markets does make managing stops difficult. But for
spreadbetting especially it can actually pay to ensure they are not too tight!