This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
After my recent focus on stop losses, here’s something different: Phasing into and out of your share positions.
Clients have a tendency to buy into and sell out of positions in one go. They decide how much exposure they want and purchase the full amount (e.g. £10K). When they want to exit, they do the same in reverse.
But isn’t this akin to calling the top and the bottom of the market? More often than not this is a fool’s errand.
An alternative is to build a position, buying more shares only if the price rises. For example, you could build a £10K position with five individual £2K tranches. After buying the first tranche, if the price doesn’t rise, you don’t take on any extra risk. If the price falls, you lose only a small portion of your £2K. Rather than a chunk of your £10K.
Once you have built up to the full £10K exposure, and the price hits your profit target, there’s no need to close it all in one go either. Just as you phased in, why not phase out? Sell the oldest tranche first, locking in the most profit. When you are ready, you can do the same with each of the remaining tranches.
If the share price keeps rallying the remaining tranches move even further into profit. If the price turns down the newest tranche may suffer a small loss but this should be offset by the older still profitable tranches. Plus you still have the buffer of the profits banked from the initial tranche.
I know I’ve written a lot about stop losses recently, but there’s no need to close positions manually either. Why not let stop losses do the work for you, taking the emotional “should I/shouldn’t I?” decision out of it? You can even set different stop loss levels for for each tranche. They’re there to protect profits as much as to prevent losses.
Many will balk at paying commission both in and out of multiple tranches, especially when incurring minimum charges. Compared to buying/selling in one hit it’s a more expensive strategy. However is this really a fair comparison? You’ll only pay more commission if you buy more shares. And you’ll only buy more shares if the price is going your way and your earlier tranches are in profit.
The additional expense of phasing in (and out) is only a problem in hindsight, if everything went perfectly to plan and the shares got all the way to your target. And it’s well known that hindsight is a trader’s worst enemy. In reality, phasing avoids the risk of exposing yourself unnecessarily to the full amount from the get go. It limits you to proportional exposure until the share price trend has proved itself sufficiently.
In the same vein, phasing out means still have the chance of making extra profit if the shares rally beyond your target. In fact, even if you bought into your position in one lump, you can still exit in segments. Additional profits should easily cover any extra commission.
As always, it’s about risk, reward and cost. Do you settle for the cheaper, higher-risk, higher-reward option, hoping the shares have bottomed out before they rally? Or do you opt for the more costly, wait-and-build strategy, which will only cost more if the share price trend leaves you confident that it merits further purchases?
Food for thought next time you trade, in or out. In the meantime, make sure you’re signed up to our Gold Pass to receive our daily trading opportunities highlighting FTSE shares with attractive Ranges, Breakouts, Momentum and Support/Resistance.
Mike van Dulken, Head of Research, 31 Jan 2019
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.Prepared by Michael van Dulken, Head of Research