Your Guaranteed Stop-Out Isn’t Guaranteed to Stop Out
Feb 27, 2012 at 3:19 pm in Orders by
If you placed a guaranteed stop order at the same price with two different spread betting companies, you would expect them both to “stop out” at the same time — or neither of them. Especially if the two companies in question both run on fundamentally the same trading platform and share the same charting package.
If you think that your guaranteed stop-out is guaranteed to stop out, you can think again, and today I have a concrete example of this anomaly.
Here is the price chart for TUI Travel for the morning of 27 February 2012, the morning on which the price apparently “gapped down” below 192 pence-per-share. It’s a chart from Tradefair, but that doesn’t matter because the equivalent chart from Capital Spreads is identical.
Suppose you, or in this case “I”, had a guaranteed stop order in play with both Trade Fair and Capital Spreads (both London Capital Group brands) to stop out at a price of 192.9 pence-per-share. Wouldn’t you be a little bit surprised if one of them stopped out and the other one didn’t? I was.
Does it Matter?
When your stop orders are not guaranteed, you need to be very wary of the prices at which the spread betting companies stop you out in the face of a price slide. You want them to stop you out as soon as possible if they can do so at a not-too-disadvantageous price, and you certainly don’t want them to stop you out at a very disadvantageous price only for you to see the price bounce right back. Either way, you really have little or no control over what happens.
When you stop orders are guaranteed then, in one sense, it doesn’t really matter if they stop you out or not. Your stop-out price is guaranteed no matter what; so they might stop you out in timely fashion or they might not, but they certainly can’t renege on their guaranteed price when they do stop you out.
Yet in another sense it does matter, because when the price bounces back — as it did with TUI Travel in my example — it may be better to be left in position (i.e. not stopped out) rather than having “gone to cash”; just in case the price heads ever higher. So in this case it seems that Tradefair (which did stop me out) did me a disservice compared with its platform-sibling Capital Spreads (which didn’t stop me out), but not the kind of disservice that I have any grounds to complain about. When all is said and done, Tradefair acted fairly in honoring my guaranteed price. And their chart proves that they were right to do so, even if Capital Spreads didn’t do so.
To conclude this article, it’s worth reminding you that in some cases a guaranteed stop that doesn’t stop out, or even one that does, could be the key to How to make a Whipsaw Profit if you’re quick enough to open an additional or replacement position at a lower gapped-down price than your guaranteed stop-out price.
Tony Loton is a private trader, and author of the book “Stop Orders” published by Harriman House.