Much excitement was around yesterday when an announcement was made that Steinhoff was going to acquire an effective 92% stake in retail giant Pepkor for almost R63 Billion. The retailer which is owned in part by Brait private equity firm and Christo Wiese is a massive step in the right direction for Steinhoff some analysts are saying as it becomes more focused on the African consumer.
However when the deal was announced it was said that Steinhoff would only pay Wiese R57 per share of which he has 609 million shares. This spooked some investors who thought the value to be more and what we saw was a massive selloff of over 20 % in the share price by mid afternoon.
In trading I don't think there's a shortage of literature relating to risk management principles with one of them being the adherence to using a stop loss. In my time trading I've come across many traders who have never used them and resulted in their accounts being blown. I thought it would be appropriate to highlight the exact point using the Brait price movement and unfold the emotional distress a trader can experience when positioned in the wrong direction.
If you had to fictitiously take a geared trade on Brait on Monday 24th November 2014 for an exposure of say R100 000, your margin would be R20 000. You went long because you had identified a bullish pattern which indicated buyers strength that would help lift the price. You decide that because the share doesn't trade frequently you leave the trade with no stop loss.
Fast forward to the 25th November and the news comes out which sends the price plummeting to lows last seen weeks ago. By the end of the first hour of trade the price has dropped more than 20%. To put that into perspective, your R100 000 is now worth 20% less which would mean the margin you put up would just be enough to cover the loss. Chances are you'll be getting a call from your broker pretty soon asking you to put down further funds.
You probably panicking and frantically search for an answer regretting your decision that you foolishly left out the stop loss. You start questioning your ability not only to trade but your financial liability you've now created thinking how difficult it's going to be explaining to your loved ones that you lost so much money in a matter of hours.
In the back of your mind there's a little bit of optimism left coaxing you to hold on in case the bounce may materialize but then your urge to sell becomes more prominent as your position is depreciating at an even faster rate.
The fact of the matter is that there are endless amount of possibilities in financial markets and when we execute the trade we effectively take over responsibility for what happens next whether it be good or bad, in most cases we expect it to always be good. However our inability to appreciate the negative outcomes clouds our judgement and places more priority on profits rather than securing the safety of our capital.
Markets have a convincing ability to allow us to form bad habits such as not placing a stop loss. You get by once and you think it always work. Unfortunately there will always be times when a trade works against you which is why its essential that any trade you take, the first step is to place a stop loss before anything else is done. That way your losses are limited to a set amount and the emotions are left at the front door.
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