Replies to post #24 on AIM UK

[ls7550]

Re Gapping

My previous posting reminded me of a element that isn't considered that often on the AIM boards - Gapping, where the stock price moves significantly through a target buy or sell price level.

For AIM gapping generally works to your advantage, you end up buying stock at a lower price or selling at a higher price.

For a stop-loss based strategy however gapping works against you, and potentially significantly so. This is where the six-sigma, black swan type issues come into play. A strategy that might seem viable on paper gets totally wiped out by the infrequent large moves.

I struggled with this for quite a while and ended up using guaranteed stops for a period of time, until I realised that I needn't pay an insurance premium and that instead a simple solution resolves the problem.

My January stop-loss position is a good example, I targeted a 5% stop loss, but actually encountered a loss over twice that amount on that position. But in rolling that position into my April's start position the loss was in effect mitigated.

I also now use manual stops based on end of day prices. If the stocks price falls below my target 5% stop loss price level at any time during the day, then at the end of day I close out the position, even if the price has subsequently rebounded back up above the stop loss price level.

Over time this simple end of day action means that some positions are stopped at a greater loss, whilst others are stopped out at a lower loss or even when in profit. Over time however the overall effect is a combined average stop loss level very close to my 5% target level across all stopped positions.