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No Guarantees on Opening Orders

Oct 26, 2011 at 3:30 pm in Risk Management by

No Guarantees on Opening Orders

Are you one of those spread bettors who sits in front of your trading screen(s) all day looking for opportunities to place a trade manually when the time is right? Or are you more laid back — okay, let’s admit it, employed in your day job — so you only review your potential trades each evening (or at the weekend) and then place opening orders to get you into a long or short position automatically when the price hits a particular level?

No Guarantees

The problem with this approach is that, unlike closing stop loss orders, it is unlikely if not impossible that your spread betting provider will offer you an opportunity of ‘guaranteeing’ your opening orders. Since there are no guarantees with opening orders, you have no idea whether the spread betting company will open your position at the higher or lower price when your chosen instrument gaps up or down overnight.

An Open and Shut Case

To make matters worse, if you adorned your opening order with a contingent ‘if done’ stop order you could even find yourself bought in at the higher price and then sold out immediately at the lower gapped-down price. It’s happened to me, and it could happen to you.

In some cases I’ve been able to argue my case and get some recompense from the spread betting company for this ‘unfair’ outcome — but not every time. And you might not be so lucky or persuasive. It may simply be that the spread had widened considerably so that your buying and selling prices were valid at the same time.

To Use or Not To Use?

Having been caught out by my opening orders not opening at the price I intended, my preference is usually to open a new position manually based on a firm quote and then let is close automatically via my stop order. This approach is not always possible, because I am a busy person who holds many positions simultaneously. I also like to place orders in advance for pyramiding into a position at the lowest possible risk when my existing position is close to stopping out.

De-Risking Opening Orders

One way to de-risk opening orders is to use them only on non-volatile instruments, but it’s hard to know in advance that a previously steady stock won’t suffer a sudden shock.

The best way to de-risk an opening order is to use a small position size, so that you don’t have much to lose if it doesn’t open at the price you want.

So as not to be limited to a small position size forever, I tend to scale into positions over time (by pyramiding) yet come out — by stopping out — all at once. Whereas my entry price cannot be guaranteed, my exit price can be guaranteed… at a cost.

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

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