Using stop loss as part of your Football Index strategy

I put out a tweet yesterday saying that I thought use of stop loss as a trading tool was an essential rule on Football Index. I got quite a bit of pushback from some traders about this, which is healthy and I thank them for doing so. It made me stop and think about the subject a little more so I wanted to record and share those thoughts.

Use of stop loss is a pretty fundamental technique in trading. It’s designed to stop us caving in to the emotional pressures associated with having to take a loss on a trade and hanging onto a stock that continues to fall and doesn’t counter-balance that with any dividends.

This pressure was definitely one that affected my trading during my first year on Football Index and I tied up capital in several trades for far longer than I should have. Most of these bad trades began in one of two ways. They were either badly-timed IPO buys (Robben, Fernandinho were my main culprits) or players who I bought during the summer 2017 transfer season who didn’t move and didn’t return many (or any) dividends (Fabinho, Belotti, Ben Gibson). A further handful were players I just thought would perform and didn’t (Michael Keane, Dele Alli, Marek Hamsik).

Now I’m not one of the mega-traders on the Index with tens of thousands invested and I don’t have a portfolio of hundreds of players. The most I’ve ever had is about 30 and usually I have around 20. So, for me, tying up capital on these players was a fairly big issue.

For my first year I had a mixed strategy with some money in long-term holds of top players (Messi, Neymar, Pogba etc) and some in players I traded in and out of more frequently. I needed to figure out what sort of money could be made and what fitted my lifestyle best.

I’m fortunate that I have time to keep a fairly close eye on the Index every day, so, as much as I made some great returns on those long holds (180% ROI on a 10 month hold of Messi for example), I couldn’t help thinking I could have made more by trading in and out of quite a few players more frequently. A lot of the players I held went through long fallow periods where they didn’t return anything (especially the MB only guys like Pogba and Lukaku).

Even Messi had his fluctuations, but with the benefit of hindsight I’m glad I held him through, his PB performance meant dividends were always just one good game away, giving traders confidence. Pogba was different, I realised his dividends were pretty “streaky” and therefore traded in and out of him a couple of times. I managed to make money out of him way faster this way, buying at £4 at the end of January 2018 and selling just 12 weeks later for an 86% ROI. I had a similar experience with Griezmann, with a 59% ROI in just 6 weeks between Feb and April.

Both these sales turned out with hindsight to be good ones as neither player has returned a huge amount in divs or reached that price since.

This isn’t to say that being a long-term holder who is immune to medium-term fluctuation is a bad strategy, clearly it’s not as many of FI’s mega traders have collected thousands in dividends alone this way. But it does best suit a certain size of portfolio and a certain kind of trader and I’m not that type.

So how does this looking in the rearview mirror help us understand how to apply stop loss as a technique for us smaller traders?The first thing to say is that I try and apply it to my current position, not in relation to my buy price. I’ve already covered why buy price doesn’t matter in another article. Go check that if you need a refresh.

I’m definitely as guilty as anyone of being too influenced by those green and red portfolio colours, I’m sure I think about stop loss more for the red ones because I hate staring at losses, but I try really hard to ignore that because it’s not the most important factor. Colour blindness might actually be an advantage for FI traders!

Ideally, wherever I’m at with a trade, green or red, I look at my current position and if I see it starting to slide I think about why that’s happening. Is there a market-influencing factor or just one bored trader dumping without much logic? If I think it is logical I’ll try and set in my mind a stop loss figure at which I’m going to get out. That shouldn’t be too small, but will vary depending on the player. Top players don’t vary much so even a 5% drop could be a serious warning signal. For a £1 player a 5% blip can be a daily occurrence so a higher % stop loss figure (say 15%) is more likely give you the optimum outcome across all your trades.

I’ll try never to over-react, but if the drop looks like it’s becoming contagious, or it’s slight but prolonged then I’ll likely look to pull the trigger on a sale. This is especially true in volatile periods such as transfer windows when the possibility of getting on another flyer is only ever hours away!

Ultimately I’m just trying to obey another trading maxim: “Let your winners run, cut your losses short”.

If I’m making this sound easy, be assured it’s not, these judgement calls are often hard to get right and there will always be exceptions where you employ stop loss and 2 hours later some breaking news causes a spike you missed out on.

But for inexperienced, smaller traders I do believe that you will make better profits by knowing about stop loss and making it an essential rule you consider employing, rather than accepting price slides and holding stubbornly through them.

Hope those were useful thoughts, never follow my (or anyone’s) advice slavishly, but I hope it helps your own thinking.

Trade Zen, folks!