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. As such, spread trading holds out potential for impressive profits, although the downside is the possibility of sizable losses, should your chosen trade not pan out as planned which is why usage of stops is absolutely essential.

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.

• Use Stop Losses: These are trading options that you can include in your order to protect yourself from incurring huge losses. You can add them when you initiate a trade or even later on. ‘Stop Losses’ are not guaranteed and markets can even jump between different price levels, which are known as ‘gap’. Markets under pressure can be particularly volatile and if the market gaps over the level of Stop Loss set by you; your trade will stop only after the next traded price.
• Use Guaranteed Stop Losses: This works in the same way as ‘Stop Loss’, the only difference being that it is guaranteed. This means that even in if the market gaps, your trade will close at the level you have specified. Another thing worth knowing is that in a ‘Guaranteed Stop Loss’ your spread will be a little wider.
• Use Limit Order: These are trading options that help you to fix your profit level. You can add this to your spread bet at your first trade or even later.
• Formulate Stop Loss Positioning: Try not to place your Stop Loss or Guaranteed Stop Loss too close to your opening position. You need to be aware that volatile markets fluctuate a bit before they begin performing. So, in such a case, it is better to have a wider Stop. However, in a vulnerable market scenario, it is advisable to trade only the capital that you can afford losing.
• Know your limits: You need to know beforehand exactly how much you are prepared to risk for every spread bet. You need to ensure that you have enough capital so as to achieve your goal.
• Be aware: You should be totally aware of the risk involved in spread betting, especially during recession. You should formulate your plan of action with a lot of care, as you can end up losing much more than what you initially invested. It is recommended that you trade with only the capital that you can afford to lose.

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. Guaranteed stop losses are sometimes also known as ‘controlled risk bets’, as they allow you to control or ‘guarantee’ your maximum loss. 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. Note also that guaranteed stop losses must be placed a minimum number of points away from the current market price. And note that different stocks have different Guaranteed stop premiums.