Trading Trail #17: Price Gaps and Guaranteed Stops

Did you see how far the price of Thomas Cook shares gapped-down yesterday? Let me remind you:

Lucky I wasn’t holding a big position in that stock, eh?

I wasn’t holding any position in Thomas Cook, but I took the gap-down as my cue to get into position at half the price that some people must have been buying at immediately before the price crash. Their unfortunate losses might turn out to be my fortunate gains.

So I went long £1-per-point at 20p-per-share with no stop order in place.When the price fell further, I “averaged down” by buying some more at 11p again with no stop order. If it goes bust, I’ll lose about £30. If it ever goes back up to its all-time high of 330p-per-share I’ll be able to book a nice holiday (perhaps with Thomas Cook) using the combined £600 proceeds.

Remember that this is not like averaging down by “investing” £10,000 and then another £10,000 only to see your big holding become totally worthless. Any stock that falls by 50% can easily fall another 50% (and in this case it did) so be careful!

Anyone who had been holding a big position in Thomas Cook immediately before the price gap would have been thankful of a guaranteed stop order and would have considered it well worth the cost. Hey, there may even have been an opportunity to try for a whipsaw profit!

All this talk of guaranteed stop orders brings me on to Admiral.

You might remember that on my latest Admiral position I was forced to accept and initial risk-to-guaranteed-stop of about £40, which I managed to close — by trailing my guaranteed stop order — to about £20. I’m pleased to report that I have since been able to raise the stop order to 825.50p (original entry price 803p) thereby guaranteeing a £22.50 profit (minus the £4 cost of the guarantee) without crystallising the profit prematurely. This is still not the profit I’m looking for but I’m trailing my stop order quite aggressively because I simply don’t trust this market.

While I’m not a massive fan of guaranteed stop orders, I regard the one on Admiral as essential because a Thomas-Cook-like gap-down of 50% could put my account in mortal danger. As if it wasn’t in danger already 😉

That’s All Folks!

In keeping with my new philosophy, I’m not going to document every in- and out-trade that I make in my public account… and this is not only because, right now, it’s too embarrassing. I’ll provide periodic updates on my progress (or lack of it) interspersed with any real-life tales that demonstrate an educational point — like the article you just read on “Price Gaps and Guaranteed Stops”.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.