Trading Trail #39: The Curious Case of Cable and Wireless

This morning I received a series of ‘order executed’ emails relating to Cable and Wireless Worldwide, and a quick check of my trade history (see below) revealed that I had almost-simultaneously bought and sold the same stock.

This isn’t one of those occasions where I got whipsawed in and out of a position, by buying a stock and then almost immediately being stopped out again, but quite the opposite. In this case I got whipsawed out and then back in again. So how could this be?

With my prevailing position in Cable and Wireless Worldwide having done so well recently due to bid rumours, I had placed an order that would open a second pyramided position when the price fell back, which it did when the price ‘gapped-down’ this morning:

(Chart from Capital Spreads, annotated)

Unfortunately — or fortunately, depending how you look at it — I also had a stop order in place to stop me out of my existing position if the price fell back; and this stop sell order executed first.

The net result is that my existing position stopped out at a price of 28 and a new position — which should have been a pyramided position rather than a replacement position — opened at the slightly higher price (due to the bid-ask spread) of 30.1. So in a sense, I inadvertently sold lower and bought higher.

It kind-of turned out as I planned, because I have a pyramiding policy of opening a new position just above the price at which my existing position will stop out — on the basis that I will hopefully double my position size with very little additional risk. But the new pyramided position is meant to open before the old position falls further (if at all) to the common stop-out level. In this case it happened in reverse.

I’ve not come out of this too badly for a stock that has fallen by some 25% in a day, because I banked £10 on my original position and my new position has a (non-guaranteed) risk of just £3, so I am likely to come out with a net profit of at least £7 minus any financing charges to date. You high-rollers can scale up the figures from my demo £1-per-point stakes as you wish.

Mind the Gap!

The case of Cable and Wireless Worldwide shows how quickly market sentiment can change, particularly when a company is subject to bid rumours that may or may not come to fruition. This is why you need to put measures in place for protecting against price gaps.

Trading Trail Equity Curve

This being my first trading trail update for a while, I should provide you with an up-to-date equity curve.

At the time of writing, the performance is not ideal because when the FTSE falls (which it has done recently), my portfolio falls faster. But I know that position trading is a marathon rather than a sprint, and some time in the future a sustained bull run will take this portfolio into the stratosphere. Really, it will!

Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman House.