Normal vs Guaranteed Stops

Leverage is most definitely one of the main attractions of trading leveraged trading products but it is also a fact that it cuts both ways and may ultimately result in losses that exceed your account deposit.

Can you go into the guaranteed stop loss a bit more? I understand how it works, just intrigued why you think it’s quite so important?

If the arse falls out of a share, the broker with shares/spread betting company with positions might not be able to find a buyer for your stock. Guaranteed position increases the spread you pay a little, but makes sure you know what your worst case scenario is.

Normal Stop Losses

A normal stop loss order is an instruction to close a spread trading position when the stock market reached a predetermined price point set by you, the spreadbetter. The possible loss is capped by requesting that the spread bet is closed out one the price has gone down to a determined level. Once a stop order is triggered your spread trade will be closed at the best available price.

For instance, if you were to go long at £1 per point on the FTSE 100 at 5500 and you were only prepared to risk losing £200 on the spread trade, you would set a stop loss order at 5300. This in practice means that should the FTSE 100 move against and fall to 5300, the trading system would close out your spread betting position automatically at the next available price limiting the loss in the process.

Note that with normal stop loss orders there is still a small risk that your closing price might be worse than the order level you specified if the market gaps through your stop (particularly if the markets shut and reopen the next day at a different price); in which situations guaranteed stops (explained below) can help.

Note: You can easily be cleaned up if your stop is within reach of the spreadbet company… so you have to set your stop loss way past what you normally would, and also then enough cash to cover that plus some more… My experience of spreadbetting was that I was actually in the long run, buying the right companies – however I was not putting up enough money to cover the losses as the prices moved against me in the short term and was either getting stopped out or faced with mounting losses had to close the position. You really need to have a good stack of cash and not over bet.

Guaranteed Stop Loss Orders

A guaranteed stop loss order offers additional peace of mind when trying to mitigate risks. With a guaranteed stop you pay a small additional fee on the spread trade to guarantee that the level at which your stop loss order will be executed is the same level that your originally set, irrespective of slippage or market gapping.

For instance, let’s suppose that you ahve gone long £2 per point on the Dow Jones at 10100, and have set 9950 as your ‘guaranteed’ stop loss level – this amounts to a £300 loss allowance (10100-9950 x £2). You can use a guaranteed stop loss order to make sure that, should the Dow Jones Index reach 9950, the trading system will automatically close out your spread trade at that exact level.

Let’s take the case where some bad company reporting results then put downward pressure on the Dow Jones pushing it straight to 9900. Your spread bet would still close out at out at 9950 even though the market never traded at your stop loss level.

I now seem more inclined to use Guaranteed Stops in IG, particularly in these volatile times. It seems to me that ordinary stops work best for the benefit of the spread betting company rather than for the punter, because – despite taking however much care as to where to place the Stop, using support and resistance, for example – it is all too easy for the share price to spike one way or the other, and you’re out just as the price recovers. At the end of the day, whether you choose for a normal stop loss or a guaranteed one, the most important thing is that you make of the available risk management facilities to control your risk.

Note: Whatever you do try to make sure your stops are set below obvious points – even numbers of pence or pounds for example. Note that guaranteed stops cost you an additional amount below the bid – so make sure that is factored into your calculations. And note that different stocks have different Guaranteed stop premiums.