ConclusionCovered warrants are a welcome introduction to the wide array of products available in the UK with which to profit from market moves – up or down. They are a regulated alternative. Whilst they are complicated to initially understand but as you get used to them they can quickly become second nature.
Like all trading success comes not only from knowing which product are available but also from the techniques of master traders. These are just some of the tips of some of the world’s leading traders I interviewed in The Mind of a Trader.
Risk Management: On a detailed analysis of the stock you plan to trade in, is the upside potential greater than the downside risk by a ratio of at least 2:1? If for instance you are looking at XYZ at 1000p, expecting a rise to 1200p, it would not be wise to say you will stay with the trade even if the stock hits 400p. In other words, how high do you expect it to go, and how low could it go before you knew it was not going to turnaround and you had better exit?
Objectivity: Maintaining an objective view about a trade is essential to being able to exit without 'psychological' difficulties. Do not become attached to a stock. The key issue is one of probability; is the expected gain on the upside greater than that on the downside?
Stop Losses: Have you set an exact price level at which you are not willing to accept further losses and will exit. This stop-loss cannot be too close to the price where you entered your position, otherwise even a small down move may trigger your stop loss and cause you to exit. On the other hand it cannot be too far from your entry price level otherwise you may lose all your investment before deciding to exit.
Just because with a warrant your losses are limited to the premium does not mean you should be always willing to lose all your money.
Discipline: Having formed a trading plan, stick to it! It is surprising how many traders ignore their exit levels when the time comes to pull the trigger because their mind comes up with a hundred reasons not to exit.
With all that – have fun and be prosperous!
ALPESH B PATEL, (firstname.lastname@example.org)
Author of The Pocket Guide to Trading Online and The Mind of a Trader