The advantages of stop-loss limit and how it helps build an imaginary portfolio.
Time to start acting like a day trader
So today's the day. After last week's pep talk from Steve Misic, the legendary trader and visiting lecturer with the Dubai branch of the Online Trading Academy, I vowed to stop faffing about (British slang for ineffectual activity, since you ask), step up to the plate and start acting like the day trader I am pretending to be.
After all, what am I? A man or a mouse? Or a man who operates a mouse but nevertheless has some undesirable mouse-like qualities when it comes to cats?
Well, here's an odd thing. As I sat waiting for the London Stock Exchange to open - 11.30am UAE time - I found myself leaning towards "mouse".
Even though there is no real money at stake, even though my home cannot be repossessed, even though I will not find myself in prison making the dubious acquaintance of large men with unwholesome inclinations and poorly executed body art, and even though my (imaginary) wife will not leave me and my (relax, equally imaginary) children will not have to be sold into slavery ... I felt nervous.
There is something about the business of putting even your make-believe money where your mouth is, which is both addictive and alarming - especially when you really don't know what you are doing.
This, I find myself thinking as the minutes tick away, is the nightmare of the school production of the musical Tom Sawyer all over again. Wearing bibbed overalls and straw hat, I'm supposed to sing: "The core of my apple I will gladly give if you let me paint a little of your fence". But under the lights all that comes out is "The ... er ... paint ... fence".
I am humiliated and lost to the theatre for life. Today, several decades later, I can, of course, remember every lousy word of what was a very stupid song.
Watching the clock ticking down to the opening bell - or whatever they use in the City of London; perhaps it's the sound of a wet, rolled-up copy of the Financial Times thwacking a passing member of the lower orders around the head - I'm tapping my fingers anxiously, constantly refreshing the page and looking for the first twitch in the charts.
And then I go to make a coffee, get distracted by a fruitless hunt for biscuits and miss the big moment.
When I get back, I find London is awake and my portfolio has jerked to life - and what's more, is up from last week's total of £16,089.82 (Dh93,598) to £16,441.74.
Oh dear. Now what? Surely it would be ruinous madness to start flogging shares that are on the up?
Then I remember a snatch of what Mr Misic told me - only a snatch, mind; a mere "apple ... paint ... fence" from an entire operetta of advice - but it is, I think, enough to allow me to act without destroying all.
As all but one of my four picks are actually up on the price I paid for them, I will set a stop-loss.
The idea of a stop-loss is to protect any profit you may have made on shares you hold, by setting up an automated sale if the price drops past a given point. The Share Centre, which hosts my practice account and is an endless source of clearly presented and patient advice for idiots like me - I really should read it more often - puts it this way: "Let's say you bought a share at a price of 105 pence and it has risen to a current price of 150p."
I should be so lucky. However ...
"You don't want to sell now, but having made a profit of 45p a share you want to ensure that you hang on to at least 25p per share gain."
And so: "Set a stop-loss limit of 130p [purchase price plus 25p gain]. So long as the price remains above 130p, you'll keep the shares. But if it does fall to or below 130p, we'll sell them for you."
Which is jolly nice of them.
My figures, of course, aren't quite as encouraging as the Share Centre's example.
So for Legal & General, purchased at 101.3p and now at 106.3, I set the stop-loss at 105p; if the price sinks back to that level I will walk away - or perhaps that should be shuffle away, dejectedly - with a profit of 3.7p per share. Multiplied by my 3,921 shares, that would add up to £145.07 - minus, of course, the pesky per-transaction trading charge of £7.50.
I place similar orders for Prudential (to sell if it the price drops to 627p, for a profit of 4p a share) and Standard Life (to sell at 231p, for a gain of 4.1p).
But what to do about Aviva, purchased at 424p and now skulking around at under 400p? Courage, mon brave! Boldly, I have expressed confidence in my judgment by setting a sell target of 430p, anticipating (in a complete absence of evidence, it has to be said) a profit of 6p per share.
But, just to be on the safe side, I have also installed a stop-loss at 390p to cater for the remote possibility that this worthless piece of junk rusts further and sinks without trace.
And that, dear reader, is my working day done. Not so bad after all. I haven't made any money, of course, but I have done something positive - or negative, depending on how it shakes down. What's more, I have also set up e-mail alerts for each of the shares, which means that unless I hear them squawking I won't have to look in on these babies for the next week.
My entire ship of shares, in other words, is steaming merrily onwards, with auto pilot engaged and bridge deserted as the skipper ferrets around below, looking for biscuits and such like.
Remind me to tell you about the time I was crossing the Thames estuary in a small yacht one dark night in a Force 6, and popped below for just a moment, leaving the tiller in the hands of my newly purchased and, if I am entirely honest, not yet entirely mastered auto pilot ...