Ask Colin

If many investors set their stop-loss at the same price and there is a profit warning, how do we get out if everyone is trying to sell?

There are a number of comments I would like to make about this:

1. What you say is perfectly true. If many investors have their stops at the same place, they will be competing to get out. This happens commonly in the futures markets and the floor traders will often "run the stops" by taking the price into that area, clean out the stops and then sell back into the market at a profit when the panic is over. There is a partial solution to this - set your stop a little further away.

2. However, the situation you describe is different. Here it will not matter if you set your stop a little below the others. If the profit warning prompts a sell-off you will be caught with everyone else. A possible solution in theory would be to put your stop a little closer to the break point than others do, but this is a double risk. Firstly, if the support level is tested, your stop may be hit, because support levels are not exact. Secondly, if it is a big fall, as on a profit warning, it won't help much anyway.

3. You suggested examples in Clough and Sons of Gwalia. These are interesting and both bring out a different point. Clough was in a clear uptrend when the profit warning came. It then fell out of the sky without any warning on the chart. There is nothing you can do about this. The only consolation is that you may have bought much earlier in the trend and still be able to get out at a profit. Another example of this not so long ago was Futuris. The idea of a stop loss is to get you out when you are wrong about a trade. Sometimes this will be close to where you are wrong and sometimes not. That is what investing and trading is all about - assuming risk to make a profit. There is no way to make only profits. Losses should be kept as small as possible, but big percentage losses will happen - they happen to me and everyone else from time to time. The only way to deal with them is through money management - you limit the risk on any one position to a small proportion of your capital. You also use diversification. I teach this in detail in my videotaped seminar as part of my overall trading plan.

4. Sons of Gwalia was quite different. My chart shows that when the big fall came, it was in a terrifying downtrend. It had already fallen from about $10 to below $5 and looked weak. Anyone buying this is trying to catch a falling knife. The lesson is don't buy into downtrends, you cannot make money doing that. You can only make money if you buy an uptrend, because you need to be able to buy low and sell high. Buying a downtrend is trying to make a profit by buying high and selling low. It cannot be done. The question of where to put a stop is really quite irrelevant. It should not be bought in the first place. The downtrend is signalling there is more bad news to come. The profit warning was it.

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