A: As well as using stop loss order to cap your risk and limit the downside of your investment, spread betting providers will also give you the functionality to set a limit order to buy or sell if the price moves to a more favourable price than the current level. Limit Orders can be used to open or close a spreadbet.
Limit Order: This is a tactic that can be utilised if you want to get a spreadbet on at a price that the market has not yet reached. So, for example, you may believe that shares in company A, which are currently trading at 14p and are falling, can only drop to around 10p, where there is support. You may choose to place an order to buy the shares once the spread gets to 10p and to do this you place an 'order'.
A STOP order is one which becomes a market order when the stop price you put in is hit.
A LIMIT order is one in which you will only be filled at your order price or better.
Both can be used for either entering or exiting a position.
For instance, you may have a long position in Marks & Spencer at 327p. You might want to take your profit should the price reach 350p, so you would set a 'Limit Sell' order at 350p. Or you might be watching Marks & Spencer but believe it is fully priced at the present time and so decide to set a 'Limit Buy' order to buy a long position if the price went down to 300p.
- A BUY STOP can only be placed ABOVE current market price.
- A BUY LIMIT can only be placed BELOW current market price. This is basically an order to open a Buy position at a lower price than the price at the moment of placing the order, therefore you believe the market will bounce back. It will hit that price and then the only way is up.
- A SELL STOP can only be placed BELOW current market price.
- A SELL LIMIT can only be placed ABOVE current market price. This is an order to open a Sell position at a price higher than the price at the moment of placing the order, therefore you believe the market will bounce back. It will hit that price and then the only way is down.
If you think about it, it makes sense. LIMIT orders are normally filled at the price you specify or BETTER. This can only happen if the market is moving down for a Buy order and up for a sell order. The reason STOPS are filled at market is that the price, in the case of a BUY order, might not retrace to a 'better' price if the market advances and there is a risk your order will not be filled. This is not what you want if you are using a STOP to close a trade that has moved against you.
A: Ok, perhaps it is best to describe this with an example. Let us assume you have a spread betting account at ETX Capital with £10,000 in it and think it is perhaps time to buy sterling against the euro. You decide the euro has a nice solid band of resistance around the 0.9490 area and your stop loss exit trade should be just above here.
Most expert traders generally recommend never risking more than 2% of your capital on any single trade.
Assume the euro is trading in a band of between 0.9345 to 0.9347 and you are happy to risk 1.5% of your £10,000 capital. You consider a sell trade of £1 per point at 0.9345 with a stop loss at 0.9495. You are risking £1 per point with a 150 point stop loss - in other words, £150 or 1.5% of your £10,000 trading capital, assuming there is no gap in the market.
But you remain unsure which way the market is heading so you hold off for an hour. Now, the euro is trading a bit higher and is now being quoted 0.9420 - 0.9422. The market has changed, and so should your thinking. You could shift your sell trade at 0.9420, but nothing has changed on the top side so your stop loss exit point should still be at 0.9495.
However, the band in which you are trading has narrowed - you are only risking 75 points - allowing you to increase your deal size to £2 per point while restricting your potential loss to £150 and so risking the same 1.5% of capital.
Your deal size has doubled but your capital risk has remained the same. Considering your exit more carefully than your entry, has enabled you to reap potentially greater rewards from your trade while also displaying professional awareness about capital preservation.
'The simple fact from our statistics is that clients have more winning trades than losing trades but the ones who lose do so because their losses are bigger than the winning trades and this is not just in spread betting but trading financial markets using margin products. It's much, more difficult than people imagine to control losses.' Angus Campbell, Head of Sales of Capital Spreads
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