Trading Spreads

A stop loss is a tool offered by spread betting firms that’s allows a trade to close at a certain price should the trade move in the wrong direction. Some spread betting firms will automatically set a stop loss when a trade is entered. It will be x points lower or higher than the price bought or sold for. It’s advisable to have a strategy in place for placing stop losses, more information on strategic stop losses can be found here. For beginners it’s a good idea to work out how much money you can afford to lose or are prepared to lose in a particular trade should it go against you and set a stop loss in line with this.

Stop losses are in place for one reason and that reason is to stop you losing or stop you losing more money. Some people chose not to use stop losses, choosing this strategy is likely to land you in a lot of trouble should the market move against you. Remember winning traders cut their losses and chase their wins.

The stop loss is therefore a critical tool in the armour of a winning trader. It allows losing trades to exited with minimum loss freeing up resources that can be invested in the next trade.

So the stop loss is an essential piece of kit but its not all sunshine and roses. The spread betting firms need to be able to make money and for this reason stop losses come with conditions.

Spread betting firms won’t let you set the stop so close to the price you entered a trade at that if the market moves against you, you won’t lose anything. It differs between firm and instrument. The minimum stop on the ftse maybe 20 points away from the price the trade was entered while on a more volatile instrument such as crude oil it may be 100 points away from the price entered at.

This allows a minimum amount of risk to be determined for each instrument you chose to trade. If a trade is placed on the FTSE at £1 per point with a minimum stop 20 points away in theory you will be risking £20 on that trade.

The above is true to a certain extent but with automated stop losses you can end up paying more than the price you set the stop at. In fast moving markets if the prices moves below your stop loss before the platform has had chance to close your trade you will have to pay more than the amount were the stop loss was set.

For example if a buy trade is placed on the ftse and the automated stop loss is 4993. The market closes over night at 4995 just keeping the trade alive. If over night the market moves against you and reopens at 4983 you will have to pay the price of 4983 even though the stop loss was set at 4993.

To avoid this happening you can use what is called a guaranteed stop loss. These stop losses guarantee you only pay the price the stop loss was set at even if the market slips past the stop. Some firms will charge a premium for this service while a small number offer it as standard.