Client A rings in, identifies him/herself and asks Accendo to “buy £10,000 worth of UK Index stock X“, because the shares are trading multi-month lows. After the usual security checks Trader B obliges, asking “what’s you plan? Would you like a stop or a limit?” Client A says “no stops, no limits, thanks, bye”.

From the client’s standpoint, they hope the shares rise to generate a profit. Simple. Easy. A more risk-adverse trader, however, would argue that No Stops? No Limits? No plan! Where do you plan on exiting?

Back in November I wrote about traders eschewing the use of stop losses for fear of being stopped out. Getting triggered on a stop loss is kind of the point though. To avoid a worse loss than you are comfortable with. I understand the rationale of ignoring them – shares can fall and then rebound even higher. It’s annoying when you have been closed out, unable to benefit. My riposte: the shares might rebound but they could also fall further.

Some clients trade without stops and limits, for precisely the above reason. They keep key levels in their head (paper is always better) where they would like to crystallise a profit when winning and/or call it a day when losing. But this relies on being in front of the screen 8am-4.30pm, every day. It’s our job to do that, but even we need to eat and take comfort breaks. And markets can move unexpectedly. What if things went crazy?

In which case, why trade without a stop loss (circuit breaker) for your worst case scenario, at the very least? I understand not having a take profit limit, to let a position run if it wants to go higher. But nothing to prevent things from going from bad to worse? Even if it is far away from the current price, why not at least have something? If the shares rally strongly, you might get taken out early at your limit, but at least you’d have booked a profit. If the shares fell strongly you might get stopped out, but at least you are can look at things afresh. This takes emotion out of the equation when the shares are moving strongly.

In fact, I find that clients who do put in even very wide stop losses and/or limits, unlikely to get triggered, are more inclined to narrow these over time. That way they at least have a plan from the outset, which can be amended over time. Because plans change, as the shares move around, reacting to news and finding new support and resistance.

You may well have wanted a 10% profit from the outset. If the shares find resistance half way, however, a 5% profit might now be more realistic. A 5% loss have may have been the worst you’d accept initially. But if the shares find support 2% below your

entry price, you might raise your 5% stop loss to just 3%, reducing your risk. This helps balance your risk/reward.

This is not advice, nor criticism. It’s an observation of trading habits with the aim of helping clients bank more profits, and take less losses. Because, at Accendo Markets, we’re here to help. You might use us as a sounding board. You might ask us for information on a stock to help you make a decision. Perhaps you just want our Trading Opportunities.

For our latest trading opportunities on UK Index components get access to our research Gold Pass and receive a hand picked selection of share price breakouts, ranges, momentum and rebound candidates to consider for your next trade. But consider Stops, Limits and, above all, have a plan.

Mike van Dulken, Head of Research, 25 Jan 2019