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 example, your set stop loss would kick in automatically the second the share dropped, and would actually end up costing you a fair amount of money when the share went back up.
So whilst stop losses are in general a good idea (and can stop you losing considerable amounts of money), they can also end up costing you potential profits if you use them too cautiously. 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.
It would also be advisable to spread your money out between investments, rather than placing it all in one company. You’d be far better advised to spread out the companies you invest in via your online trading account; this way you’ll end up with a more balanced portfolio, that should hopefully cover you from the potential of losing everything in one go.
If you utilise 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.
