Q. Dear Josh, is September usually a poor month for stock markets?
A. According to research by MarketWatch, since the formation of the Dow Jones Industrial Average, the stock index has lost an average of 1.13 per cent in the month of September. By comparison, the index has gained an average of 0.75 per cent in all other months. Due to this, historically September is on average a bearish month for stocks and spread betters need to be on their guard in case history repeats itself this year. That said, the historical performance is not always a good guide to the future. This has been proved in the last few years. In 2008, the FTSE fell by 13 per cent. In contrast, last year the FTSE rallied 4.5 per cent in September. Certainly the much better than expected nonfarm payrolls and private payrolls data out of the US has helped traders start the month on the front foot this time around.
Q. Dear Josh, is it a good tactic to adjust my stop loss to lock in profits when my position is on-side?
A. From a risk management perspective this can be a good tactic. When the market is in a firm upward trend you should adjust your stop loss as you keep racking up profits. This way you are removing the potential to net a loss in the trade, as long as your stop is guaranteed, of course. There is, however, a flip side to this: in volatile markets, a stop loss can work against you. Remember, by adjusting your stop as the market moves in your favour, you are, in effect, bringing it closer to the real time market price. But you need to be aware that markets can move quickly. If you have a stop loss close to the market price and then prices take a brief surge downwards, you could be stopped out of your trade for a small gain, as opposed to netting a much larger profit should the market continue to trend in your favour.
Q. Dear Josh, should I run my losses in the hope that the markets will eventually turn in my favour?
A. This is a very dangerous tactic. From my experience, a typical feature of a bad trader is that they run their losses and cash in their profits too early. If a market is trading against you, by running your losses you are merely escalating your net loss until some point when you feel enough is enough and close your trade for a heavy loss. Much of the decision to run a loss comes from false hope. Stick to your trading plan and decide to get out of a trade when you believe price trends have proved your premise for entering a trade to be false. A stop loss could be a good tool to prevent your emotions from clouding your trading judgement.
Learn more about the markets and spread betting with Josh at his free City Index seminars