Spread Betting ‘Stop-Losses’

Wednesday, 26th January 2011 12:32 - by Robbie Burns

First of all, thanks a lot for the feedback on my new Spread Betting book. It seems to have helped a lot of you and I’m glad about that. The one aspect of Spread Betting that still causes problems is ‘Stop-Losses’. Where to place them and how to handle them? Especially with some of the very volatile shares. How do I use them? Well, I don't use sealed-in-cement stops with Brokers for my normal share buys. I have some written down, but I use advfn's ‘Level 2’ (Ed: lse.co.uk is working towards offering L2 sometime soon!) data and other factors to decide whether to exit those shares (often Small Caps). The last thing I want is for my Broker to sell something that has only gone down briefly, or the spread has widened temporarily. I want to make my own firm sell decision. Also, I don't use automated Spread Bet stops with Small Cap spread positions. This is to stop me getting stopped-out on a ‘Tree-shake’ or some such; and again I want to make the final call. Where I do use them is with Spread Betting the more volatile FTSE250 and FTSE100 stocks...but I would never ever keep a stop where it was after I first placed it and I move them all the time. The one thing I think not to do is simply place a Stop-Loss somewhere near the current price and that's it; because more than likely you will get stopped-out and lose every time. Stop-Losses ought to be moved about depending on what is happening with the share. If your share is going up it can be moved. Up until then, make it a ‘bank profits’ stop (also known as a ‘trailing’ stop). If you set a stop, but it looks likely to go lower temporarily because of, say, a Rights Issue or a Placing or an Ex-Dividend. Thus, you see a temporary dip but want to stay with it, moving the stop lower before the market opens. So, never sit there with a static stop. Check your stops every night. Move winning positions stops up a bit. On losers, check again whether you should be in the share and maybe cut the position, or if you think a temporary circumstance will move it lower but you want to stay with it, move it. One example would be if your share is about to go Ex-Dividend. Some shares go ‘Ex’ for big amounts. This could hit your stop! Move it down before the market opens because (of course) a share opens lower by the amount of the Dividend, but usually a Dividend will be credited to your account. Maybe there is a Rights Issue - say 30 points lower. You don't want to be stopped-out because you will get new shares at the lower price. When you check your stops at night think ‘Could I get stopped-out at 8 a.m. if there is a silly wide spread or a temporary spike down for a couple of mins at the start of the day?’ Most spread firms will show you the current price and the price of your stop, so it's easy to check. It only takes me a minute or so every night to go through and amend them as those at my Seminars have seen me do. By moving stops and checking them every day you will avoid taking losses that you shouldn't have taken and will also help you to take profits unemotionally. A quick example (More is in the book, available from lse.co.uk's Bookshop) - say you hold a volatile share trading at 300. A stop should probably kick off at 250 to avoid a sudden spike. If the stock moves to 350, reset the stop to 300. Keep moving it up 40-50p under the current price. You can of course use charts to help set your stop and, if so, best to set it a little under a support point so it is a bit below other people's! As you get more experienced, it gets easier. One thing to remember is that I am around a screen all day. You might have a job and can't see what's going on for much of the trading day. So, it is perfectly ok for you to have ‘proper’ stops on everything, unlike me. But if doing it on Small Caps, do remember to keep the stops well, well away from the entry price. For those of you who read my website (www.nakedtrader.co.uk), it must be noted I don't change the stops on there as it would just be too much effort for me to do. If you are looking at stops on my trades there, remember they have probably already been moved because of a changing share price or subsequent events. Hopefully, once you have been trading for a while, you will find a stop strategy that suits you. Finally, I don't use guaranteed stops - the extra spread on using them to me is too much for the occasional time they might pay off. However, again I am at home all day but you may find the protection re-assuring if you can only (for example) look once or twice a day. Good luck with stop setting, but remember the one over-riding element...never set them too tight!