No one likes to be on the wrong side of a profits warning and they are thankfully not too common. This week, however, we had two of them from UK 100 blue-chips, both companies’ shares falling by a whopping 10%. But it needn’t have hurt that much. There are simple things you can do to prevent having to grin and bare the pain.

If you did lose money, or saw your profits eroded, when Mondi or GKN delivered bad news this week, this can still serve as a lesson learnt for future trading/investment.

Protective stop losses (standard, trailing or guaranteed) are a very valuable tool when trading CFDs. In the case of GKN, a guaranteed stop loss could have been placed below recent lows to protect from any potential drop if there happened to be bad news or a market plunge.

In theory, surprise declines this morning could have been limited to, for example, just 5% rather than the full 10% they opened lower. Quite a difference I’m sure you’ll agree. If the shares had merely maintained their uptrend, said stop loss could simply have been adjusted higher from time to time, locking in more profits along the way. Easy! Trailing stops can’t protect from a share price plunge, but they will adjust the stop loss higher at regular intervals to protect more profits automatically if the share price rises.

Many traders are happy to trade without stops, more fearful of being spiked out of a trade and taking a small loss than they are of wearing a significant loss. This mindset can prove dangerous in the long term. Yes taking a small  loss is annoying, but it may have been because the stop was too close. Recent highs and lows must be considered as areas that are likely to be revisited.

What you are really trying to protect from is a major breakdown and change of trend that might ultimately prove costly. At the end of the day taking a small loss still leaves you with nearly all your capital. For more on this, see our education on risk vs reward.

Having bounced from 313p in late August, GKN was trading just above rising support at 350p yesterday, just back from highs of 360p. Whilst there was potential for the shares to rally again (another bullish flag?) there was no certainty that this would materialise. A guaranteed stop at 335p could have protected you from any breach of rising lows and a drop below the key 200-day moving average at 344p, which would have suggested a major change of trend.  A 17p/5% loss would have been far easier to digest than the 32p/10% drop this morning to not far from 2017 lows.

Yes they might rally back, but they also might fall further.

Trading without any protection risks losing more than you might really be comfortable with. And the dangerous tendency when a price drops is to hold on, hoping the shares bounce back. They may well do so – it does happen – but remember that when a price falls by 10, 30 or 50% it has to rebound by 11, 43, or 100%, respectively, just to get back to where you were were. Never mind rally further.

As the market adage goes, “a long term trade is often nothing more than a short term trade gone wrong”.

For more such trading education get access to our research now and  sample the difference that Accendo Markets offers versus the competition.

Have a safe weekend.

Mike van Dulken, Head of Research, 13 October