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About Orders

Posted By Robert On Friday, November 15th, 2013 With 0 Comments

When spread betting is important for clients to manage their trading accounts effectively, including any open positions and the subsequent risk that may be incurred.

Spread betting carries a high degree of risk, so whilst it is possible to make substantial profits, it is also possible to make significant losses. Spread betting providers offer a number of ways to manage your risk through the use of order management.

What is an Order?

An order gives you the option to open or close a bet at a specific price chosen by you. Therefore it is an instruction you give to the provider to execute a trade if a certain price is achieved. You may choose to buy or sell a particular market at your chosen level in order to open or close a position.

The stop loss must be tied to the amount of money you expect to make. If you are risking 60 basis points, the upside should be, say, 120 basis point, this would imply that even if you are wrong 50% of the time you will still make money. A good understanding of risk and reward and a pre-defined target for how much you hope to make is important. You can get the market direction right but markets don’t go up or down in a straight line and there can be periods of volatility that catch you out unprepared.

Don’t run your losses!

Allowing a losing position to get worse by moving your stop order further away is a cardinal and common error made by retail clients; one which you would never expect a professional or institutional investor to do.

Our psychology as traders and rational human beings drives us to bite our finger nails and hope (or even pray) that a worsening position will come back in our favour; rather than biting the bullet and cutting the loss. If the market does come back, the temptation is to breathe a huge sigh of relief, close the position for a meagre profit, and congratulate ourselves on having done so well to avoid a £1,000 loss and actually realise a £10 profit. It sounds logical, but is not good risk management.

Why would you want to place an order?

You may not want to trade at current market levels but rather enter/exit the market at either a higher or lower level than the prevailing price. This could be for a multitude of reasons, such as the market reaching your projected target level, or for technical reasons, such as capturing support and resistance levels in the market.

Orders are useful when you are unable to monitor the market all of the time or if a market moves too quickly for you to trade at a specific level. Orders allow you to determine the price you wish to enter or exit a market, then when the market reaches that level the order is carried out according to the type of order you have left.

Closing orders can be used for limiting your risk (Stop Order) or taking profits (Limit Order). An order will continue to be active until a market move triggers that order, the order expires or the order is cancelled by you.

You can place orders using the online trading platform, via mobile platforms or over the telephone with a member of the company’s trading team.

The most common types of orders are Stop and Limit Orders.

Stop Orders

In my opinion, stop orders are perhaps the most important weapon in the spread bettor’s armoury. Some spread betting companies automatically apply a default stop-loss order to each bet that you place, to guard against it going too far against you, but you can change the stop level to what you consider to be a more appropriate stopping-out price. Some spread betting companies do not automatically apply a stop-loss order to each trade, which makes it all the more important that you get into the habit of thinking about your exit (via a stop order) when you enter each trade.

Whereas much of the conventional literature covers stop orders as a mechanism for stopping losses – hence the term “stop-loss order” – it is worth noting that stop orders may be just as useful for locking in profits on winning positions as they are for limiting losses on losing trades. They may even be used for entering new trades as well for exiting existing trades.

An order to buy or sell an instrument once the price of that instrument reaches a specified price. When that specified price is reached the Stop Order becomes a market order.

Buy Stop Orders are typically placed at or above the market price.

Sell Stop Orders are typically placed at or below the market price.

The advantage of a Stop Order is that you can potentially limit your risk in case of an adverse movement in the price of the instrument you are trading. The disadvantage is that a short term fluctuation in price may activate your Stop before reverting back to a normal trading pattern. Because a Stop Order becomes a market order once activated you may be filled at a price significantly different from the Stop price (except where you have a Guaranteed Stop Loss order).

Example

You bought £10 UK 100 at 6350. You decide that you want to limit your risk and close your position if the market falls 100 points below your entry point, therefore you place a Stop order below the market at 6250.

If the provider’s bid price for that market were to touch, or fall below the 6250 level, your Stop Order would be triggered and executed at the first available price.

The UK 100 did indeed fall to 6250, your Stop order was triggered
and executed and your risk was limited to £1000. The outcome was:

Opening Level 6350
Closing Level 6250

100 points

You bet £10 per point, therefore 100 x £10 = £1000 loss

By attaching a Stop Order to a position you may potentially reduce the amount of your Margin Requirement on that trade (see Orders Aware Margining for more details).

You can also place Stop Orders to open a position. You may wish to enter the market at a worse price than is currently being quoted (e.g. due to technical support and resistance levels in the market).

If the Wall Street Rolling offer price was 13200, you may wish to buy at 13250, but not until it reaches this level. You may then leave a ‘Stop Order’ to buy at 13250. Your order will then be executed at the first available price when the provider’s offer price reaches 13250 or higher.

Please note that in some circumstances we may not be able to execute your Stop Order at your chosen level and your trade could be executed at a worse level. This could be due to situations where the market is unusually volatile and subsequent gaps in pricing occur. In these situations the provider will endeavour to fill your order at the next best available price.

To ensure your chosen level is guaranteed, some providers offer Guaranteed Stops.

Market Volatility

Setting a stop too tight could very well kick you out of a good trade on a bad day of market volatility. In very volatile market conditions you might be better off not utilizing stops at all.

If you are looking to take advantage of short-term momentum trades, then obviously the stops have to be tight (although not too tight). For longer value trades, stop orders should be utilized with caution as value plays can continue being adversely priced for a long time and could even continue slipping in the wrong direction for some time.

Limit Orders

An order where the customer sets a maximum price he/she is willing to pay (as the buyer) or a minimum price he/she is willing to accept (as the seller).

Buy Limit orders are placed at or below the market price.
Sell Limit orders are placed at or above the market price.

Example:

You have just bought £10 UK 100 Rolling at 6350 but will be away from your computer for rest of the day and wish to close your position and take a profit should the market trade 100 points higher.

You therefore set a Limit order to sell £10 of UK 100 Rolling at 6450 (above the market).

After some bullish economic data at 1.30pm the market rallied.
Your limit order was triggered and executed (by selling £10 UK 100 Rolling) when the ODL Markets sell price reached 6450.

Your profit:
Opening Level: 6350
Closing Level: 6450

100

You bet £10 per point, therefore 100 x £10 = £1000 profit.

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