Stop Losses - Trading Newbie Needs Help

Lecky2000

Please can someone help???

Hypothetically speaking, I want to place a stop loss on my trade but need help understanding the relationship, if any, to price per point.

Say I want to place an order and I've chosen a % of my total capital I want to put forward, 10% for arguments sake. As I don't want to loose to much of the 10% I've put forward I'll will be employing a Stop Loss. OK so far

OK, so how do I calculate how many points I'm prepared to lose before my stop loss kicks in. I know as a percentage how much i'm prepared to lose of the 10% put forward but how do I turn that into a tangible number that equates to what i'm buying?

Please forgive me if none of the above makes sense but i'm very new at this and am struggling to wrap my head around some aspects. Any help anyone can provide would be great.

Thanks

masonic

Maybe I'm not fully understanding the question, but if say your buy price is 200p per share, and you don't want to lose more than 12% of the money you put into that investment, you'd set your stop loss at a little over 176p [200x(1-0.12)].

Edit: or are you spreadbetting, in which case I have no idea?

bowlhead99

Let's say you are trading a company ABC plc and its price of ABC plc is 250p. And let's say that due to the market spread between the bid price and offer price, you can either buy (bet on the price going up) at 251p or sell (bet on it going down) at 249p.

If you decide to bet £10 per point on the price going up, and the price instead falls to a level where the bid price is 225p, you will lose 26points x £10 = £260. If the price falls to 150p you will lose 76 points x £10 = £760.

If you have £20000 of capital and have only 'put forward' 10% of it, as you say, you might have £2000 in your trading account. If you are only willing to risk a quarter of the £2000 on this particular trade and no more, you can only afford for the price to move against you by an amount that costs you £500. It should be pretty clear that if you are betting £10 a point and you can only afford to lose £500 then you can only afford to lose 50 points, right? So, you would set your stop loss 50 or less points away from your start point. That would be somewhere within the range I gave in the examples. So you would end up with a stop loss 50 points below your start price, or 201p.

Clearly of course if you were betting a different amount per point, you can afford to lose more or less points before you run out of money. At £5 per point you could afford to lose 100 points. At £100 per point you could afford to lose 5 points. The dealer might not let you put a stop loss only 5 points away from your buy price of 251, because that is only 3 points below the current bid price of 249.

One thing to be aware of is that if you want to exit a position there has to be a market for it. So if everyone in the world is trying to sell and nobody wants to buy, you are not going to be able to close your position until the price moves to somewhere where someone would buy it. Because you selling your £10 a point relies on someone buying £10 a point.

Let's say you have a stoploss set to exit ABCplc at 201p. The price drifts down on Friday afternoon to 205p but your stop loss does not trigger because it's set lower, so the broker does not sell your shares. Then we go into the weekend and the market is closed. Over the weekend there is some negative press about the company or their major customer goes bust or war breaks out in the middle east. On Monday morning nobody wants to buy shares for 205p or 201p or 191p. The market opens at 185p. The broker has an instruction to sell your position because it's now well below your stop loss. However, you are in a queue in the market and by the time you get to the front of the queue and he can find someone to buy your position, you exit at 182p. So you've lost 69 poiints, or £690, which was more than the £500 you were hoping to lose.

There is no real way round this if you are buying physical shares or contracts for difference. However if you are using spread bets, which are entirely 'virtual', the spreadbet dealer may offer '"guaranteed stops". This is basically an insurance policy that says you will definitely get out at your stoploss position once the market moves through it. In order to be able to afford to guarantee your exit despite market conditions, you would have to pay a bit more spread when taking the position. So for example the underlying mid price of ABCplc is 250p, but the standard bid/offer price is 249-251p, and the 'guaranteed stop' or 'controlled risk' bid/offer price is 248-252p.

The extra cost of entering a position with limited risk may hurt your profits so much that your trading isn't profitable. But it does mean you know exactly what is at stake and therefore you may not need to front as much margin because it's clear how much loss can actually be made on a trade.

Of course having written all this, what I should have said is "don't give up the day job":

Lecky2000 wrote: »

...need help understanding the relationship, if any, to price per point.
....
I know as a percentage how much i'm prepared to lose of the 10% put forward but how do I turn that into a tangible number that equates to what i'm buying?

"relationship if any" ? Of course there is a relationship between how much you might lose, and how much you are betting/investing per point.

Consider the trade you are about to make.
*How much do you want to bet - £0.50 per point? £50 per point? *How much might you win at £0.50 or £50 per point if the market moves a certain distance?
*How much might you lose at £0.50 or £50 per point if the market moves a certain distance?

Once you know how much you will lose if the market moves against you by x points, it should be trivial to decide whether tou want to risk that much or set a stop loss before you hit that amount of market movement. Same with a limit order to sell out of a 'winning' position e.g. if the market movement meets your objective of going up from 250p to 265p or whatever.

Glen_Clark

I like stop losses.:) To make a profit I need to buy shares cheap, and nothing crashes the price of good shares like a wave of stop losses kicking in