13 Apr Explaining stop-loss orders (and how we’ve used them in the iTrade Fantasy League Portfolio)
As we explained on Friday we placed stop-loss orders on all the shares in our iTrade Fantasy League portfolio on Facebook to limit our losses. Billiton triggered on Friday and we sold all 180 shares at R255 per share. On Monday the price is down another 1% or R2.50, but we are not participating in any losses anymore. Harmony triggered its stop-loss on Monday at R21.50 and we managed to sell all 2,000 shares at about R21.46. Note that our minimum order price was R21, but you will always trade at the best bid price in the market if your limit is lower, see table below.
What is our stop-loss strategy?
We placed stop losses at about 8% below the cost of each share with a limit price on the order another 2% lower. This means that we should not lose more than 10% on any share, unless there is a big fall overnight. You should always put the limit price on the order below the trigger price to ensure you get out. If the trigger price is reached and the next traded price is lower, your order cannot be executed if your limit price is the same as the trigger price.
For those shares that are already trading in a profit of 5% or more, we placed the stop-loss at 8% below the current price. This way we are trailing our stop-losses up as the shares rise. We hope to automate this process on Sanlam iTrade so that you can place automatic trailing stop-loss percentages. For example, Naspers breached R2,000 per share on Monday for the first time. We placed our stop-loss at R1,840 and the minimum order price at R1,800 per share. We only paid R1,750 per share for Naspers. We did the same for other shares up more than 5% like Aspen, Discovery, FirstRand, Mr Price and Steinhoff.
We did not place any stop-losses on the ETFs. The reason is that the ETF issuers or market makers, who have to provide the liquidity for their ETFs, wait for 15 minutes to 30 minutes for the share prices to settle before they start to make their bids and offers. This means that there are often wild swings in the trading prices of some ETFs far away from the fair value of the underlying shares in the ETF basket. This irrational trading can trigger a stop-loss order to our detriment. The issuers or market makers will always bid or offer at prices close to the fair value of the underlying shares, that way you are not dependant on other buyers or sellers in the market. For more on ETFs see our Blog: Focus on ETFs – here are the basics.
Below is a list of the current stop-loss orders in our portfolio: