Stop orders are the most important element that I use when spread betting.
If you read my risks and benefits post you will understand that I never enter a trade without first working out the what my maximum risk on that trade will be.
Stop Orders (or stop losses as they are also called) allow you to walk away from a losing trade knowing the maximum amount you could lose.
Types of Stop Order
In the main there are 3 types of Stop Order
Guaranteed Stop Order
When you enter a Guaranteed Stop Order the spread betting company will stop your trade when the market hits your target. This obviously guarantees you, to the exact point, a “get out” price. For beginners this is the best type of stop order (in fact most companies force you to have these in place if you are a new account). You will know, to the penny, what your maximum risk is.
But, with guarantees comes a price. You will be charged extra on the spread for guaranteed stop orders.
Normal Stop Order
Normal Stop Orders are placed the same way guaranteed stop orders are but they have a slight difference. They are not guaranteed to stop on the precise point. Your bet will close when the spread betting company can action your trade in the underlying market. In a slow, non volatile market this will not be much of a problem as the price will not change much in the few minutes that it takes to close your trade. However in fast moving markets you can end up 10, 20 even 50 points away from your original stop order if the market moves faster than the closing of your position. This is known as slippage.
Trailing Stop Order
A Trailing Stop Order is a good way to lock in your profits. As your profit increases your stop order also increases, it “trails” the price.
Here is an example
Say you buy BP at 500 points and put in a Stop Order at 470. Obviously you want BP to go up but if it turns against you the most you could lose is 30 points as your stop order will kick in and close the trade for you.
Now, in this example say BP went up to 550 over a few weeks then went back down to 470. If you had not closed your trade manually you would have missed the profit and end up losing 30 points when your stop order kicked in.
With a trailing stop you can set a specific distance away from the current price that automatically adjusts as the price increases.
So in the example above you could set a trailing stop at current price – 20. This means as the price went up 550 (ie increase 50 points) your stop order would also increase 50 points to 520. When BP turned and went down to 470 your trailing stop would close your bet at 520, thus gaining you 20 points profit.
Now, some people I talk to say they are always on their screen and can close positions manually when they see the market moving against them. I never like to do this for several reasons.
I do not want to be glued to the screen all day.
Some markets are 24 hours and can swing massively overnight while you are asleep (especially large price market like forex, copper etc).
I like to trade to a strategy, a logical strategy with no emotion. Rules are set at the beginning of a trade and only close when one of the rules have been broken. Sitting there watching markets go up and down all day will not only drive you mad but also bring make you stray from your trading strategy.
When I trade I only close a bet when one 3 things happen.
- A stop order has been hit
- A signal has turned from a buy to a sell.
- A limit order has been hit (limit orders are the reverse of stop orders, sell when it hits this price)
Other than that I very rarely close a trade manually, and normally only when I need to free up some deposit money for a better trade. AND GUESS WHAT, I close a losing trade, NEVER a winning trade.
To succeed at spread betting takes a winning strategy or system, keeping with that system and do what the signals it tells you, PLUS minimising your risk by placing some kind of stop order.
I will go into some more of my general trading guidelines in later posts.
Seb’s Spread Betting