Keep your eye on the ball to score a financial goal
I can honestly say this has been my finest week as a trader so far. Not so much for the money I've made but for the fun I've had, watching the e-mail alerts flying in, the stop-loss and sell orders execute with automated precision and, when required, making some swift and decisive decisions of my own. It's been quite a rush.
It started like this: last week, I pulled out of all insurance stocks bar two - Prudential and Aviva. The Pru had not exactly been a star, but it had held its own and, under my new policy, any stock earning its keep gets to stay on board provided it doesn't fall below a pre-determined level.
The level I set for the Pru was 620 pence, which it hit mid-week and, courtesy of my robotic Share Centre executioner, it was out the door, with not so much as a by-your-leave.
Admittedly, this was not exactly a triumph on my part. I had bought in at 623p, so I took a fractional loss, but the stop-loss had done what it says on the tin: it stopped any further loss. That said, within a few days I noticed that the price had risen again, to 624p, but I guess that's life in the stop-loss trenches.
The next order of business was Aviva, now my one remaining insurance stock. This was a fumble on a larger scale, although my excuse is that the price was sinking while I was still coming to grips with the whole stop-loss business.
About two weeks ago, Aviva cost me 424p; when I finally woke up to the fact that not only was it leaking gas like a cheap party balloon but I had also failed to deploy a safety net, it had deflated to 402.9p, whereupon I got rid of it.
These two sell-offs had left me with more than £8,000 (Dh47,225) cash in hand and the first order of business had to be planting that seed corn back in the ground - and it was clear where. BG, the former British Gas, has been the best performer among my new stocks, rising steadily from my buy-in point of 1,197.5p. Amid a flurry of trading in the real world - trackable via my Share Centre practice account - and a chorus of aggregated brokers shouting "Buy!", I piled in a further £8,200 at 1,246.5p a share.
And then, when another of my stop-losses was suddenly triggered, I unexpectedly found myself with yet more loose cash on my hands. A week ago, I had taken a handful of British Land at 510p; this time I had set the trap ruthlessly at the same price. If it touched it within my trading week, it was gone. And so it came to pass; no gain, but no loss: a perfectly executed strategy, in other words. I think this means I am learning.
I ploughed the £1,990 I harvested from the sale straight into BG.
This had left me with just three stocks, all of which were now fenced about with various sell orders. For BG - now a considerable holding of 984 shares, worth in the region of £12,240 - I set the line at 1,238p, profitably above the 1,197.5p I had first paid.
But, as the price rose, I raised the sell floor to 1,240p. To give the price room to grow, without prematurely bailing and potentially missing out on bigger profits, it also made sense to raise the ceiling, too: now a sale would not be triggered until the price hit 1,255p.
I was about to tell you what precautions I had taken with First Quantum Minerals but, even as I write, the market has moved and - voom; it's gone from my portfolio, launched by a draconian stop-loss sell. And before I look at the whys and wherefores, I must do something with the extra £1,900 I now have to play with.
I'm feeling a bit uncomfortable now I am down to just two stocks again, so I go looking for a third. Out of habit, I glance at the Pru - and guess what? Since I sold, it's continued to rise, improving from the 620p at which I had sold to 628p. Shares aren't like relationships. Pride doesn't come into it. When it's all over between you, you can start again whenever you feel like it, and so I do, at 628p a share.
So back to First Quantum. The bottom line is that I bought for 5,443p and sold on an automated stop-loss at 5,421p. Dumb. Why? Looking back to when I knew less - as far back as last week - I realise that in my caution I was setting the sell point too low, settling for the risk of slight losses in the hope that any minor slump would immediately be followed by a gain.
It could be - the Pru proved that - but the key to this whole business is not to take any chances and always, always, always to set stop-loss sells at a level that makes you some money, no matter how little. Selling at a loss - and especially teeing yourself up to guarantee you will sell at a loss - is a mug's game.
And talking of mug's games, I take a minute out to fix a new safety net under the Pru: it has already crept up a fraction, to 628.5p, and so I tighten the net to 628p - and if the price shifts higher I will raise the sell line higher as well. Currently, a sell will be triggered if the price hits a high of 640p.
Which brings my to my final holding, the minerals multinational BHP Billiton, which I bought into at 2,237.5p. This has been doing solidly, making its way steadily upwards to 2,275p. And, as the price rises, so it is necessary to adjust the defences upwards as well - it will now sell if it reaches (an admittedly ambitious) 2,300p, or if it slumps back to 2,270p - in either case, a profit of more than 30p a share.
Now that's the way to do it. I think I'm getting the hang of this. Have I made any money? Well, yes, kind of. It was a lot of running about for £56.28, granted, but I have some valuable lessons - chief among them is that a day trader has to have the time to keep his eye on the ball.
Published: November 4, 2010 04:00 AM