One of our members has, very sensibly, enquired as to the ’safety’ of our ‘Stop-Loss’ protection system. Our answer includes the following comments:
One of the reasons why we restrict ourselves to the FTSE 350 stocks and currently, in this volatile market period, eschew Small Cap and AIM stocks is that it is very rare for any such large and liquid shares to suffer the sort of calamitous collapse of up to 50% overnight. That, of course, doesn’t mean that it is impossible but it is very unlikely.
It is possible for a gapped open to exceed our stop-loss price and it happens perhaps 1% to 2% of the time. As we use, and recommend, the tight money management rule of 1.5% of capital the resulting loss of, say, 2% or even 3% is far from calamitous and is recoverable.
Having said that, one should bear in mind that investing/trading on the stock market is a ‘risk’ business. The unforeseen, the exceptional, the ‘one off’ event is an ever present, if relatively low, risk. If one is not prepared to accept that risk then one should not be investing into shares of any nature or size.
Some of us suffered badly in the 1987 stock market crash when share prices tumbled by some 25% over two days (and the stock brokers took their phones off the hook so none of us could trade!!) but it is a different world now but I, for one, would not say that it could never happen again!
Controlling the risk, watching and managing each holding and minimising losses is the secret to making money on the stock market.
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