Stop and Stop Limit Orders in Spread Betting

If you already know the difference between stops and stop limit orders you can skip this and go directly to my workings with them

Stop loss orders in spread betting are some of the best techniques available to investors. But make sure you know the difference between a STOP and STOP LIMIT order.

When you already have a spread betting position, you can place a “stop loss” order. These are standing instructions, with a time line, which direct your spread betting firm to sell your stock under certain conditions. Generally, stop loss orders are used to either protect a profit, or to prevent a loss.



 

Two kinds of Stop Loss Orders

There are two kinds of stop loss orders: STOP or a STOP LIMIT order. Both are designed to sell your stock “automatically” when certain events occur. However, it is important to understand the difference between the two, because the circumstances under which the order is executed is different. To get the results that you want, make sure you place the right type of order.

Note: Most spread betting firms use the terms STOP and STOP LIMIT, as described below. However, you may wish to confirm the meaning of a Stop loss order if your brokerage uses terms other than those described here.

Stop Orders in Spread Betting

A SELL STOP order is used to protect a long position.

A SELL STOP Order is an order to SELL below the current market price, but only when the market trades below your specified STOP price. The market must actually trade below your specified price for your order to become effective.

When the stock trades below your STOP price, your SELL STOP order immediately becomes a SELL AT MARKET order. It will most likely be executed quickly after the market trades below your STOP price.

It is important to note that because a STOP SELL order becomes a market order, your executed price may not be close to your STOP price.

For example, a SELL STOP order for 100 Shares of XYZ for £22 does not guarantee that your stock will be sold around or even close to £22. If bad news comes out overnight, and XYZ opens at £15, below your STOP of £22, your SELL may occur at £15 or even £14. However, your order was executed. If the stock continues to fall to £10, you may be gratified that you got out when you could.

By contrast, however, in situations where a stock price drifts lower, rather than collapses, the SELL STOP order generally trades close to the specified STOP price.

A BUY STOP order is effectively the same, but for an initial short spread betting position.

Stop Limit Orders

A STOP LIMIT SELL order is similar to a SELL STOP order, however, the specified LIMIT price is the only price that you will accept for the trade. As soon as the ASK price hits your specified STOP price, your trade becomes a SELL at LIMIT order. This does not guarantee that your order will be filled. There must be another party who fills your order.

In a rapidly falling market, your spread betting order may never be filled with a STOP LIMIT SELL order. If other SELL orders at lower prices start to appear, your order will be left behind, unexecuted at the higher price.

For example, in the example above, if XYZ opens at $15, from a close of $30 the day before, your STOP LIMIT SELL order at $22 will never get executed. This may be what you want, but if the stock continues to drop to $10, you may wish you had a STOP SELL order at $22, and been “stopped out” at $15.

A STOP LIMIT BUY is the same type of order for an initial short position.

Which to Choose?

The SELL STOP order makes it more likely that your order will be filled. The risk you take is that a rapidly falling market will sell your shares lower than you expected. However, you can always reenter the stock at lower prices after your SELL STOP order. Choose the SELL STOP when you truly want to make sure your order is filled, and you are fairly certain that any decline will be orderly.

The STOP LIMIT SELL order specifies the minimum price you will receive, if your order is filled. Your order will not be filled unless the market begins to trade right at the price you specify. Since all stocks fluctuate to some degree, you probably should not set a STOP LIMIT SELL order too close to the current price, if you are trying to protect profits.

The risk you take with a STOP LIMIT SELL is that the market moves right past your limit price, and you are left holding stocks when the price is well below where you wanted out. Choose the STOP LIMIT SELL if you want to avoid feeling cheated in a rapid decline, and would rather guarantee the price when, and if, your order is filled.

With most brokerages, both SELL STOP orders and STOP LIMIT SELL orders can be placed as either day orders, or good until cancelled orders.

Controlled Risk Bets

Spread betting companies provide what is called the controlled risk bet or CRB.

These are a particular type of bet that guarantees to exit your position what ever happens at the exit price you set.

So if you longed Moni at 2.80 with a CRB stop at 2.20, when it collapsed over night to ~1.20 you would be out at your stop.

Normally the controlled risk bet stop has to be placed at least 10% off the stock price (or a set number of points off the index price).

But of course you pay for it with a higher spread typically 0.5% extra.

My Experience with Stops

Stop loss orders in spread betting are useful, but they don’t eliminate all risk. You can either make sure your stop order is filled, (STOP LOSS) or you can make sure you get the price you want (STOP LIMIT), but you can’t get both.

Believe it or not if I’m baby sitting a position I always put in a quick stop if i go to the toilet. For this I always set a normal stop (i.e. a market order). However it pays to know the stock you’re in and this is fine if it is a liquid stock with lots of players at each level (another reason for viewing a Level 2 screen). Then i know if the stock tanks when I’m out of the room I’ll get a decent fill. However if the stock has weak hands and big gaps between the levels I’d be worried about where I might get filled.

I enjoy looking for consolidations or stocks set to run and putting buy limit stops just above the action. If they run too fast i don’t want to get filled by a market order but if I do manage to get my limit filled I’ve got a good entry point. I’ll then switch in and manage the position.

I did this with PRSF some time ago – a stock which I had followed for six months and knew it well. My buy stop got hit at $1.60 just above the consolidation and I ran it to the obvious level of $2 for a nice 25% gain. You can imagine my surprise when it ran on nearly same distance again. It ran up over 50% on the day.

For fundamentalists. Its got $155 million to get thru the recession, so i didnt think it was going bust. I’ve had it on my watch list for such a long time. At 80c 3 weeks ago i just didnt think it could go much lower but it was still in a down trend. But it went up 300% in three weeks !!!!

Any of my buy orders I just leave in for the day. At the end of the day everything is cancelled I sell out of everything into cash because I don’t like uncertainty hitting any overnight positions. Now and again I’ll hold 1 position over to take advantage of a gap on the open the next morning.

On most software you have to buy the stock first before you can put in a sell stop. However there is so much proprietary software around that nothing would surprise me. I always liked an order they had at CMC in the UK which was an OCO order (one cancels the other) you bought the stock, put in a target sell price and a stop at the same time then when one was hit it cancelled the other.

In any instance when you leave orders in the market to buy stock you must have a plan and part of that plan must cover unforeseen circumstances. With daily 4/1 margin you really shouldn’t get into a position where you could buy to much stock.

It all comes down to this – you are totally responsible for your actions and you must have a plan to cover everything because one day the unforeseen will happen believe me; I’ve had it myself and i’ve seen other traders have it happen to them. It costs you thousands and it hurts. However you learn from it and you make sure it never happens again.

The worst I saw was a stock collapse and a trader not take his stop, the stock went into freefall and he was unable to get out (because he hadn’t learnt his Level 2 properly and didn’t know how to hit the lower levels where no one was trading) The NASDAQ pulled the stock and stopped trading in it. They didn’t allow any more trading that day. When the stock opened the next day it gapped down another 50% on the open and continued to sell off. Do you see why a plan and discipline are so important?

My biggest mistake cost me about $4000 in about 10 minutes. It was rather a complicated thing to happen but I’ve never forgotten how I should have handled it and I changed my procedures to take into account it ever happening again.

Having played “smart” and entered your stop loss or buy limit (or whatever), NEVER EVER forget it!!! You may have placed it whilst a visit to the loo is undertaken. Then you suddenly find there’s a run in your direction and you close off for a handsome profit. UNFORTUNATELY you forgot to cancel your “stop” trade…….and guess what? an hour later it gets executed just at a time when the stock is tanking…and guess what else? It was a bottom and now the stock is flying again…except you are SHORT!

Here’s another story that a fellow trader, Mark sent me – :

I went long at 6350 and placed a sell stop at 6340. The future rose and then immediately started to retreat. At breakeven I picked up the phone to my broker (no online facility then) and by the time it was answered the FTSE was at 6342. I got filled at 6338. I then instructed the broker to cancel all stops. He confirmed that all stops were cancelled.

I did a couple more trades, and then after the market closed I phoned to confirm that I “had no positions open”. The broker checked my account and said that I had “no positions working”. Fine. Well, no actually.

I didn’t trade again for about 2 weeks, and then had a week at home during which I did about 15 trades, which on the face of it were mainly profitable. Hey! I’m getting the hang of this!

The statements piled up and one evening I sat down to sort through them. They really didn’t seem to make sense, and the bottom line was about £600 in my favour more than I had reckoned. So the following day I phoned the broker to clarify it, and he said that I had one FTSE 100 future open! Yet I hadn’t traded for about 3 weeks!

You are probably ahead of me, but what had happened was that on the first day of trading, my instructed sale went thru below my stop which had therefore been triggered. Therefore I had bought one and sold 2, so the net position was that I was short one contract. When I asked for confirmation that all stops were cancelled and I was told that there were no more stops in place, this was true, because my stop had been filled and therefore was not outstanding. And when I phoned to ask whether I had any position open and was told that there were “no positions working”, this was also true, because I didn’t appreciate then that this refers to unfilled positions rather than filled ones. He had answered a question I hadn’t asked and I didn’t understand his answer!

So for about 6 weeks I was permanently in the market, except for the few occasions when I thought I was opening a position, but which in fact was closing the one that was already open, and had been for days! I then sat sweating profusely until with a great sigh of relief I closed out, but which was in fact opening a new position which was then left in place for days!

The net result when I discovered the error was that I had made £600, but I break into a sweat everytime I think what may have happened.

  • Check your statements immediately.
  • Get absolute confirmation that your position is “flat” i.e no positions open. If terms you don’t understand are used, ask again and again until there is unambiguous confirmation that your position is as you believe it to be.
  • If you intend to close a lossmaking position yourself, don’t set your stop too close.
  • Always balance the number of long and short positions, and at the end of a busy trading period, double check after you have finsihed for the day, either online or by a phone call, that your position is as you believe it to be.
  • Wait until Monday before moving your stops if possible as exit stops could be triggered in error in the underlying market over the weekend. I always wait until at least 8am on Monday before adjusting stops on my account and advise you to do the same.

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