With Canada Day kicking off the start of the lazy days of summer, investors might consider putting some safeguards on their portfolios before tuning out.
An ongoing trade war and an unpredictable political force in Washington present an additional layer of uncertainty during a season with historic volatility.
The CBOE Volatility Index, also known as the VIX or the fear gauge, has retreated from an early April trade war spike but the period between July and September often has spikes of volatility amplified by low trading volumes, the absence of hard financial data, and second stringers on trading desks.
But there are precautions investors can take right now to protect more volatile positions and make the summer stress-free.
Limit losses and lock in gains with stop-losses
Placing “stops” on stocks during the summer can lock in gains if they rise in value and limit losses if they plunge.
A basic “stop-loss” is a pre-set price below the current price of a stock you own that will trigger a sell order if it falls to that level. For example, if a stock purchased at $10 has a stop-loss placed at $8, losses will be capped at $2 per share.
A “trailing stop” automatically resets the stop as the stock rises. In other words, if a stock rises, the trigger to sell automatically moves up in proportion to the real-time price, like a moving stop-loss. In addition to locking in gains, a trailing stop locks in bigger gains as the stock rises.
It’s important not to set them too close to the trading price or they could be triggered by volatility unrelated to that specific investment. In addition to losing a potentially lucrative position, investors could rack up unwanted trading fees.
The cost of utilizing conditional orders on most trading platforms is included in the trading fee, so there is no extra charge for the investor. Many even offer online tutorials on how to effectively use them.
As a general rule, professional traders set stop-loss orders within 10 per cent of the current price but expand them for more volatile stocks that trade on less volume. They often use target prices from analysts that cover the stock or pick support and resistance levels from technical charts.
Other portfolio pre-sets
Stop-loss strategies vary and are just one of an arsenal of conditional orders that give do-it-yourself investors the ability to pre-program their entry and exit strategies.
Investors can also employ opportunistic strategies with buy and sell orders. One strategy for bargain hunters who love a stock but refuse to pay a high price allows them to pre-set a lower price that they feel is fair through an “open-limit order.”
Another conditional order with as many variations as an investor can dream up is a “stop-and-reverse.” Most often when a long position reaches a specified stop-loss, it is sold, and a short position is opened at the same price. It’s important for retail investors to be aware that conditional orders are even more vital for short positions, where there’s no limit to how much a stock can rise. In such a case, a “buy-stop” order can limit losses or lock in profit.
Strategies can also be implemented involving partial positions. If a stock doubles, for example, a stop-loss on half the position can preserve the initial investment.
Traders should be aware that in most cases conditional orders expire after 30 days. If you don’t keep track, your investments may not be protected.
It’s also important to know that a stop-loss might trigger below the pre-set price if a low-volume stock is in a free fall. It’s like firing a bullet at a fast-moving target.