Guaranteed Stop Losses: are we Doomed by Asian Ducks or Melting Penguins?

Guaranteed stop losses can prevent some nasty surprises and allow spread betters to relax a bit when they're away from their screens. Jo. Tura (from the Finspreads Trading Academy) talks tactics and looks at the ups and downs

The primary tool in a spread better's armoury when it comes to limiting risk is the stop loss order. You can set a stop when spread betting just as you can when trading traditional shares and, for a small sub-charge, a stop loss may be guaranteed, protecting your order in case the market gaps past the order level.

Let's look at an example of a guaranteed stop loss: say a spread better is trading BP, that the price is 560p, that a stop is set at 550p and that, when the UK market closes at the end of the day, BP is at 555p. Then, overnight something happens to the stock price. Perhaps there is a fire at a BP plant, or disappointing results announced before the UK market opens, which means that when it does open, BP shares have gone down to 545p and gapped past your order level of 550p. A non-guaranteed stop loss would only be triggered when markets opened, meaning the loss of the 5p a share. An order that had been guaranteed would be triggered at the 550p you had guaranteed it at.

Market and Quote Orders

Market orders and quote orders can also make a difference in how you protect your bets. A quote order includes the spread from the spread betting company, while a market order is triggered when the cash price - not including the spread - is reached.

'There are a number of different reasons for choosing a quote order or a market order,' explains Finspreads' Josh Raymond. 'One key reason is that with indices we run them 24 hours a day, so they are tradable outside market hours when there is a wider spread. If some clients don't want to be sold in at the wider spread they will basically just leave their orders to market.

'However, it is important to remember that leaving an order to market does mean that the market could gap past the order you have placed. Say you have a trade on the FTSE with a stop at 6,150 and the market closes at 4.30pm 50 points away from your level.

To trigger or not to trigger?

As with the scenario on guaranteeing stop losses used above, something happens to your market overnight. When it's not open, the FTSE tracks other major exchanges so, if rumours in the US bring the Dow down, the FTSE will fall with it. Overnight, then, the FTSE is down to 6,120 on the back of rumours.

If you have left your order to quote, your stop loss is triggered and you are sold at this low level. Then, however, as can happen with rumours, they turn out to be a false alarm and a few hours later the FTSE opens completely back to normal. Leaving your order to market would have meant that it hadn't been triggered at the low overnight level.

'These kind of things are why really knowing your markets also limits your risk,' comments Raymond. 'Learning all about the markets you want to trade, using our Trading Academy, is a real help - so you're used to things and not just jumping in at the deep end.'

The seminars that spread betting companies put on also deal with learning about the different markets and what makes them move. Furthermore, data is available to help navigate the markets and what affects them.

'We have an economic calendar that has economic data such as the Bank of England rates decision and the US non-farm payroll data, which moves markets massively, as it did just recently,' says Raymond. The other set of data to watch out for is of course the company-specific reports, accounts and announcements, which are also available as part of Finspreads' research package.

Last but not least, going back to order types and the part they play in limiting risk, the time basis of an order, if it does not get triggered by a stop loss, is a factor.

Orders may be left good until time, good until cancelled or good for the day. Again, knowing how your particular market works is vital in deciding which time basis to work upon.

Good until time means until a time that the better specifies. Good until cancelled is the most popular time basis to work on and, as the name suggests, just means that the order stays until the better cancels it. Good for the day - also fairly obviously - is when the order is cancelled at the end of the day (midnight).

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