When to Guarantee Your Spread Betting Stop Orders

For some time I’ve not really been a big fan of guaranteed stop orders due to the costs involved and the fact that good diversification across a number of positions should provide adequate protection against individual price shocks. Yet I’ve found myself guaranteeing my stop orders more and more recently, but only under certain conditions.

In this article I present my four tips on when to guarantee your stop orders:

1. When you can’t afford the loss

As I argued in my article Only Insure the Risks You Can’t Afford To Take, you really don’t need a ‘guaranteed’ stop order attached to your minuscule £1-per-point position on a 10p stock. So what if it gaps down 50% and you make a ‘paper loss’ of £5? You can afford the loss, and you might as well hang in there to see if it recovers. But when you’re holding a £10-per-point position in a 1000p stock in your £5000 spread betting account, a 50% overnight gap-down on that one stock could wipe you out.

Guarantee your stop orders when you can’t afford the loss.

2. When it’s nearing the end of the trading day

When do price gaps usually occur? That’s right — overnight, or over the weekend, which is pretty much the same thing. If you established a new position this morning following an overnight gap-down, you might consider a guaranteed stop order to be unnecessary throughout the course of the trading day because the price is unlikely to gap down again (though it could drift down) until the next morning.

For this reason I’m more inclined to apply guaranteed stop to positions established towards the end of the trading day, or to guarantee my existing stop orders (if possible retrospectively) just before the market closes. Until them, I consider myself to be pretty safe from though not immune to another price gap.

Guarantee your stop orders when it’s nearing the end of the trading day.

3. When a position has moved in your favour

All guaranteed stop orders, and some non-guaranteed ones, are subject to a minimum stop distance which may be further away from the current price than you would like. I don’t want to guarantee a loss of £20 when my money management criteria tell me to limit my loss to £10 on a new position.

If your new position moves in profit by £10 during the trading day then the available guaranteed stop level will have moved up with it, so now would be a good time to apply the guarantee to your stop order or to trail you existing guaranteed stop order to your preferred level. If the price subsequently falls back, the level at which any new guaranteed stop orders can be placed will fall back also, but your existing guarantee will remain at the level you set. It’s like a ratchet that turns only one way.

Guarantee your stop orders when a position has moved in your favour.

At the time of writing I have a profitable position in Mitchells and Butlers, on which new guaranteed stop orders must be placed no higher than 241.4 but on which I have trailed my guaranteed stop order to a higher 247.4. I have a position in Tesco with a guaranteed stop order at slightly-better-than-break-even price of 318.8 despite new guarantees requiring a stop level no higher than 313.3. All because I placed those guarantees (or trailed my existing guaranteed stops) when the prices had moved in my favour… and before they fell back.

It pays to trail guaranteed stop orders quite aggressively while a position is moving in your favour, because you lose the opportunity to specify a higher stop level if you don’t use that opportunity. But don’t worry: the minimum stop distance is usually still so far away that you won’t get stopped out on a market whim. And if you do, it should be at a profit, which brings us to…

4. When you can guarantee a ‘profit’

Keeping in mind my first two points about whether you can afford the loss associated with a gap through a non-guaranteed stop, my preferred time to guarantee a stop order is when I can guarantee a profit. I mean, who wants to ‘guarantee’ a loss in the meantime?

Guarantee your stop orders when you can guarantee a ‘profit’.

The problem here is that not all spread betting companies allow you to guarantee a stop order retrospectively on a position that is already in play. For example: Capital Spreads do, but IG Index doesn’t. On platforms that allow guarantees only at the time of opening a new position, you can still use one to guarantee your loss at a level you can afford, but you need to be extra-vigilant about trailing the guaranteed stop order as soon as the position moves in your favour. In the meantime you might employ an additional standalone non-guaranteed stop order to take you out of position at break-even or on a smaller price fall, like this:

The Bottom Line

If you’ve taken a position in a multi-digit high priced stock on which you can’t afford a 20%-50% (let alone 100%) gap-down, if it’s nearing the end of the trading day, and if the position has already moved in your favour, then it’s time to guarantee your stop order. If you had to guarantee it from the outset on your trading platform, don’t miss the opportunity to narrow the distance-to-stop at the earliest opportunity.

Try to guarantee your profits rather than your losses, and don’t even bother guaranteeing the losses that you can otherwise afford to take.

Oh, and as an added bonus, your use of a guaranteed stop order could even lead to you making a whipsaw profit.

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