In the current financial climate, particularly coming off the back of a nationwide recession, stop losses probably seem like a good idea. In a lot of instances, it may well be a good idea to be cautious with them, but you need to decide exactly where you’re going to set them. Too close to your initial entry point and you risk being closed out just as the share is about to jump up.
For example, say you’re share dealing in a big corporation, and your stop loss is set just under your entry point. It’s not uncommon for a share price to drop just for a few minutes before jumping up again. In this instance, your stop loss would kick in as soon as the share dropped and you’d end up missing out on a considerable profit.
So whilst stop losses are a good idea to ensure you don’t lose a fortune, if you’re too cautious with them they could end up costing you substantial profits. On the whole, i’d suggest you set your stop loss at around 10-15% less than your initial entry point. This way if your stock drastically drops, you’ll be protected from losing a fortune, but won’t be stopped out just for brief, small drops.
There’s another issue here too, you should avoid placing all your trading money in one company, as you could end up losing it all in one go. You’d be much better off spreading out your investments in your online trading account; leaving you with a more balanced portfolio that will cover you from losing all your trading funds in one share drop.
If you’re using a spread betting firm to manage your trading, make sure you set a guaranteed stop loss. It’s important you use the word ‘guaranteed’ to ensure your stop loss actually kicks in at the exact price you’ve suggested, rather than just around it.
