Guaranteed Stop Loss
Financial spread trading can be a risky business. If markets move sharply the wrong way, losses can quickly burst right through a trader’s pain threshold. Thankfully, financial spread trading offers an opportunity for traders to control risk. These are guaranteed stops and regular stop-loss orders
The Guaranteed Stop Loss (GSL) works just like a stop loss order, the biggest and only difference is the price that you request the trade to be closed at, IS the price you will be guaranteed it will be stopped at. The price for using a guaranteed stop loss order is usually several points extra spread on the trade and therefore and increased cost to your for executing the opening trade. In a nutshell, it costs you more money!
Note that most spread betting providers will charge you an extra fee for placing guaranteed stops except for Ayondo which offers free guaranteed stops on most of its markets (except individual shares) subject to a minim stop distance and up to a certain stake. So for example if you were to open a spread bet on the German Dax for £20 per point (it has to be lower than £25) and the stop loss is at least 34 points away then the stop will be guaranteed free of charge and automatically by Ayondo.
A guaranteed stop loss order (sometimes referred to as a controlled risk bet) special type of stop-loss which guarantees at all times (even overnight) that the spread bet will be closed out at exactly the level you specify.
Guaranteed Stops
The trader asks for a position to be closed out automatically if the spread hits a certain level. In return for agreeing to this, the spread betting company will charge the trader a few extra points on the spread when the position is opened.
When you place a controlled risk bet, you pay a small premium (by way of a slightly wider spread).
Example: ‘Buy December Dow £20/point at 7600 with a controlled risk stop at 7400.’
You absolutely cannot lose more than 7400 – 7600 – 200 x £20 = £4000.
Even if the quote passes straight through the 7600 mark overnight, and open in the morning at 5000!!
Let’s consider why guaranteed orders might be necessary and what the guarantee means.
Sometimes a share or Index can ‘gap’. What this means is that it closes at one price on one day and opens at a different price the next day. Figure 11 below shows an example of Millennium & Copthorne Hotels which gapped down due to some adverse news outside of market hours.
The first thing to point out is that gaps do not tend to show in line charts such as to those we have looked at so far. This is because a line chart simply joins the closing price for each day with a line.
You need to use a bar chart (as Figure 11) or a candlestick chart, which we will look at later. These charts show the open, low, high and close price for each day.
In the bar chart above, each day is represented by a bar. The bottom of the bar is the lowest price for the day. The top of the bar represents the highest price for the day. The dot or line to the left of the bar is the opening price and the dot or line to the right of the bar is the closing price.
So we can see that in Figure 11 you have opened a long trade at 337 and set a stop at 346 to lock in some profit. The price closed on 30th August at 360, above your stop. On the 31st August the opening market price was 346, below your stop, a drop of 14 points overnight.
If you have used a normal stop and the price gapped down overnight as above, the trading company would stop you out at the first available price once the market opens in the morning, in this case at a market price of 346. This is known as ‘slippage’.
Slippage is the difference between your required order level and the executed order level.
A Guaranteed stop means that even if the market gaps out of hours like this, your stop position is guaranteed and you will be stopped out at exactly the level you have chosen.
Futures Guaranteed Stop Example
- Say you wanted to make a £10-a-point down-bet on the FTSE100 index future for September from 5300, the bottom of a 5300-5310 spread.
- However you are aware that a sudden take-off in the market might cost hundreds or thousands of pounds
- A jump in the spread on the September future to 5900-5910 would leave you facing paper losses of £5900 (5900 minus 5310, times £10).
- To ensure that this nightmare did not unfold, you could arrange with your bookmaker a guaranteed stop at 5500.
- In return for this, you might be charged three points extra on the spread, so the trade would turn into a down-bet from 5297 rather than from 5300.
- With the guaranteed stop in place, there would be no way that you could lose more than £2030 (5500 minus 5297, times £10).
- If the stock market rose and the spread moved up to 5490-5500, or even if it “gapped” straight up to 5600-5610, the bookmaker would close the bet out at 5500.
Some spread betting providers even allow a guaranteed stop up or down during the course of a bet.
Some trading companies offer ‘Controlled Risk Bets’. These are trades where a guaranteed stop is automatically placed a minimum distance from the opening price. You may want to consider these but you will pay a wider spread and the stop may be further away than you would like.
Costs and Limitations of Guaranteed Stop Loss Orders
With normal stop loss closing orders we pay for opening a trade with a spread (difference between the mid-price and opening price), this is where the spread betting companies makes their money – it’s a common misconception that spread betting companies makes their money from those that lose. In fact the bookmaker in this case makes their money from the spread and it’s the money from those that lose that pays those that win. I have been asked many times in the past, if a spread betting company could close your account if you get too good. The simple answer is they would be stupid to do this. As the better you get at making trades and the more successful you become the larger trades you will make and the more you will make them. Therefore, more profit for the bookmaker.
The spread is no different if you open a trade with or without a standard stop loss closing order. However, should you decide to use the above guaranteed stop loss order closing order, the spread will be much larger, PLUS you usually have to pay an additional few points on top of the trade too, much like an insurance payment. So you do pay quite a bit more for your trades using a guaranteed stop loss order, but they will save you a fortune should things not go in your favour.
To be honest, I rarely use a guaranteed stop loss order, simply because I rarely trade in highly volatile areas. Even when I do, I tend to know the market a little before I go in so I know what to expect to a degree. However, for you I would recommend that if you decide to venture into volatile markets – ALWAYS use a guaranteed stop loss order . It will save you much more than it costs in the long run. Remember, out of 10 trades we can realistically only expect to make a real profit on 4. The other 6 we can expect to be losing trades. Therefore if we are not clever with our money management and go for volatile stocks & markets without using a guaranteed stop loss order, the losing trades will eat into the profit made from the profitable trades and possibly into our deposit margin.
Plus guaranteed stops are only offered on some shares – often with smaller caps they are not available, especially if expecting news. I don’t bother with guaranteed stops as much as I used to – the minimum stops are often too wide to be placed sensibly. A good option in certain scenarios though.
At the end of the day it is your choice how you trade and whether you use a standard trade on a 3 month contract or a daily with a guaranteed stop loss order. I have a friend who has traded for many years and only uses guaranteed stop loss order. But by the same token he is a very careful trader and doesn’t like risk much at all.
We want to keep the risk down to a bare minimum. Which means making choices based on our ability to read charts and some fundamental data, then making wise opening trades and being clever by using stop losses, guaranteed stop loss orders and locking in profit as and when we can. PLUS making sure the losing trades we have, lose little and make no significant impact on our overall profitability.
To recap then; use a standard Stop Loss (stop loss) closing order on less volatile markets & stocks (FTSE/DOW), Do NOT set your stop loss order too close to your opening one, or else you will get “Stopped Out” and lose money, LOCK IN profit as soon as you can by moving your SL order in the direction that locks in profit (depending on whether you have gone LONG or SHORT), and finally USE a Guaranteed Stop Loss (GSL) when trading in highly volatile markets etc. (technology stocks for instance).
Finally on Stop orders. Don’t use a guaranteed stop loss as an insurance on a trade that you are uncertain about. If you are uncertain, simply DO NOT MAKE THAT TRADE.
The tools that we are provided with by the spread betting companies, although very simple ARE very powerful and KEY to your success in Financial Spread Betting. Use them and use them wisely. Abuse or forget them and you will fail, like the 90% of the mug traders who blindly trade and have no money management.
We have come quite a long way in a relative short period of time. Don’t worry too much if none of it is sinking in properly yet. Understand that I was in the same position as you are now, but once I got my head around the fact that what I was learning to do was/is relatively easy, it became much less complicated. Remember, read the modules a couple of times, and do a few examples of your own, try your best to work out any problems yourself. You can of course email me with any concerns or problems that you may have. I am here to help you as much as I can.
You should now know what Financial Spread Betting is and the basics of opening and closing a trade, in addition to the main tools that the spread betting companies provide you with to limit losses and lock in profit. We have also made a realisation that the biggest mistake that most make is, the incorrect use , or lack of use of the tools that are given to us by the FB’s.
Now don’t go and think you can start trading just yet, or that is all we’re going to cover. What I have taught you so far, you could have easily learnt anywhere to be honest. In fact there are plenty of books and courses that just talk about what I have gone through with you. What they tend to do though, is add a ton of padding to make the £20 that you have paid for the book, or the £200 for the course seem good value – when all you would have probably learnt is what I have told you in these last two modules. Thankfully, you are wiser with your choices than most.
The main misuse of guaranteed stops (and normal stops) is that traders have to be careful to set their stop far enough away from their starting level to give them a decent chance with the trade. If for instance you place a guaranteed stop within 50 points of the spread on a Dow Jones index bet, you could be ‘stopped out’ by a relatively small move in the index.
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