Use Those Stops

I ran a shares seminar last week and met an awful lot of people who've been dabbling in shares..

And.. a lot of them have been losing! Well, of course, it's very hard to make money right now unless you really are a hotshot daytrader.

The reason why became obvious as the seminar went on. Quite simply: not using stop losses. That is - selling a share immediately it falls a certain amount - say 5 or 10%.

I spoke to some investors who simply struggled to sell anything at a loss and held onto losers in the hope that "They will go back up sometime.."

One chap had bought RBOS at 400p, 300p, and 200p and now said it was a "Long-term investment".

As we older traders know.. long-term investments are short-term investments gone wrong!

If he's had say a 10% stop loss he'd have been out of the first trade at 360p.

My personal view is that stop losses for investors in this market are very important - otherwise capital disappears.

A lot of brokers are now offering "trailing stop losses". I think these are a good idea because they rise behind the share price and so also lock in profits. Take a look at some of the broker sites which explain trailing stops well.

But a quick example: say you bought a share at 150p. You set a trailing stop of 20p. The share is then sold for you if the share falls 20p from its high. So say it goes to 200p, your trailing stop now rises to 180p. If the share then falls to 180p, your share is sold and profits locked in.

The main thing is it locks in profit and takes emotion out of trading.

If you're spreadbetting using stops do remember you need to ask for a "guaranteed stop" to ensure you get the stop you want but you have to pay a bit extra on the spreads.

In these difficult markets I think taking losses quickly is essential - hanging onto losers for now can really damage your bank balance.