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How to limit your risk / remove emotion – part 2

Tip 56. Although similar, a ‘Controlled Risk Bet’ or ‘Guaranteed Stop Loss’ should not be confused with a ‘Stop Loss’.

A Stop Loss is not Guaranteed.

Let’s say you have a normal Stop Loss on the FTSE 100 which you bought at 6541. If so, your stop loss could be set at 6501. However if there was a sudden bear market and the FTSE tumbled you could be in trouble without a Stop of some sort.

Perhaps another large bank issued a profit warning…perhaps the US Federal Reserve did something unexpected.

Either way, the markets rarely move smoothly from one price to the next, they tend to ‘Gap’ instead. Ie leave Gaps in between the prices offered. eg it could fall from 6541 to 6538 to 6524 to 6503.

In the above, your stop loss won’t have kicked in. Now the next drop or gap could be down to 6480. That’s where your stop loss would be filled. Not at 6501. With a Guaranteed Stop Loss or Controlled Risk Bet you often have a slightly wider spread but your stop loss is guaranteed. eg in the above you would be closed out at 6501 not 6480 even if a price was never offered at 6501.

57. Learn to Cut your Losses. As discussed many times on this site, Stop Losses are a useful insurance tool. However, if you get into a spread trade and it looks like a poor decision then cut your losses. Try not to wait for your Stop Loss to kick in. Get out of the trade and keep your losses as small as possible.

Eg in the above example, why wait for a Stop Loss or Guaranteed Stop to kick in at 6480 or 6501 if you can close your position earlier for a smaller loss?

58. Clearly you shouldn’t trade whilst under the influence of alcohol or any other substance. You’re likely to place poor trades with a larger-than-usual stake size. Not an ideal trading combination

59. Stick to your Trading Spreadsheet and plan. Plan everything and follow your plan. Plan. Getting it yet? Plan. Plan. Plan. Make sure that as part of your plan you understand the risk-reward ratios. Also makes sure you understand the market influences like government reports, related markets, support levels, resistance levels, historical price levels, seasonal influences etc. Many of the key Economic Indicators and Company Results and now listed on this site each week.

60. Patience is a virtue. It’s a virtue you need if you are to trade successfully. If there are no good trades to be done for a week or two then don’t think ‘oh I’ll have a small interest on XYZ’. That’s gambling. The summer is normally a quiet trading period (summer 2007 was an exception). Ensure you wait for the right trade and congratulate yourself on being patient. Don’t forget to congratulate yourself on not losing any money. You’ve still been watching the markets, you’ve still been learning and you’ve not lost any funds. Bravo!

Good Luck!

DB

And because we’ve been neglecting you for a little while, a few more tips

How to limit your risk / remove emotion – part 1

53. Try setting yourself a ‘Total Loss Limit’ to cover all of your investing before you start trading with real money. This should be an amount that you can afford to lose eg £5,000.

As soon as you get to your Total Loss Limit, stop. Stop Spread Betting. Close your bets. Close your accounts and stop. By all means try again later but wait until your funds have been sufficiently replenished before starting again.

In the meantime, take a break and/or paper trade and research. You’re probably going wrong somewhere. Work out what it is that you are doing wrong so that when you start again you don’t just lose another £5,000.

Have a look at Spread Betting Tips 1 to 29. Make sure you’ve got plenty of data to analyse the problem(s). Yes tips 1 to 29 are dull but they help.

54. Use a Stop Loss. They can cost a little more in the short term but a Stop Loss will generally stop you from holding on to poor bets. That will save you money and stress. Firms like Financial Spreads and Capital Spreads add automatic stop losses to all bets. Don’t worry too much about firms adding these ‘automatically’ you can always re-set the stops to something more aggressive if that’s what you want.

55. It’s also worth looking at a Limit Order to help reduce the emotional angle, ie an order to close a bet if it reaches a certain level. eg if you buy a share at 450p you can also place a Limit Order to close that bet when it hits 490p. That way you automatically bank a 40 point profit (if it hits 490p). Of course, the share could go higher and you could have made more money by not closing the trade. Nevertheless Limit Orders can help your discipline, releases funds and margin for more trading. By reducing the greed element they can stop you from holding on to a share after its gone up and is on its way back down

Good Luck

DB