Before the COVID-19 stock market crash, we were living in a relatively low volatility environment in which stocks in a bullish trend did not have great corrections. Now, investors and traders are much more nervous, and prices vary a lot even within the day.
This “new reality” of financial markets brings a common mistake that you may be suffering. Have you sold a stock in a small correction to see that it started to rise just after your sale?
If that has happened to you, do not worry because it means you are using stop-loss, and that is a very good practice that means you are on the right path.
If in this new market you are experiencing that your old way to use stop-loss is not working, it may be because you have to adapt your strategy to your volatility.
When volatility is high, it may be worth it to use the strongest stop-loss instead of just the last stop-loss. This means that, for example, instead of placing your stop-loss in the last low correction that you can see on the daily chart, you have to take the low from the weekly chart.
Of course, this will mean an extended stop-loss with an increase of potential losses. This has two consequences:
- You will operate less.
If you usually operate successfully, it is likely that before you launch the order you are deciding your profit goal and your stop-loss, and you are only operating the opportunities in which the profit goal is significantly higher than the stop loss.
If that is true, when choosing a lower stop-loss, you will increase the potential losses. Thus, there will be fewer operations that will offer you a positive proportion between potential profits and potential losses.
- You have to use smaller stakes in your trades.
If the potential loss is higher, you need to reduce the amount of money you invest in order to be able to keep your positions in case there is a correction. If your stop-loss is a 20 percent loss, it will not make it easier to support a 15 percent loss in case it happens. However, according to the strategy, that 15 percent should not be enough to make you nervous. In order to achieve that, you have to invest less money because it is not the same to lose 15 percent when it translates into 100 pounds than when it translates into 1,000.
Conclusion
It is time to be extra cautious with the positions. As a result, one may want to invest fewer times and less money and try to keep the rules that make you decide to enter in a position as strict as possible.
*This blog post only has an entertainment intent and should not be taken as investment advice. It may be wrong or lacking information please contact us if so. If you have doubts, ask your financial advisor.