MOVE FASTER ON LOSSES?

My goodness, I had a revelation yesterday!

Nope, I haven't found God. I remain Atheist-lite, just in case…

I was 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.

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.

That is when the revelation hit me.

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.

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 and 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 any trade I think should be monitored really closely.

The share was bought at a fiver and the market generally falls and the share falls to 490. How's about getting out there and taking a tiny loss fast?

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 just 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 take 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 selloff overdone and I was being a clever so and so by spotting it.

However, I was in reality making a bum trade.

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.

I quickly decided 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 lot more.

The stop indeed would have worked as it ended up going under 500. But I would have lost a lot more money by just relying on the stop.

If the trade had worked and the share had carried on rising over 600, instead, I could then have changed the stop to breakeven at 575 initially and then relax with the trade.

So what I think I am saying is the first day or two of a trade are probably the most important. If the trade works then you can relax, move a stop up.

One thing I know I have been doing terribly wrong recently: and that is selling winning trades too early.

The worst one was Smiths News. The trade plan worked, buying in the low 90s and selling at 110 where there was previous resistance. It's now 150. Bah!

And the trade I talked through a couple of months ago, Playtech. Again the trade plan worked - bought at 325 sold near 400.  Now 425. A good profit but could have been an even better one.

What can I learn from this? Okay fine to take profits on those trades - but I should learn to re-enter them as they break out higher.