Stop Loss (Can Be Guaranteed)
Perhaps the most well known of all the orders is the stop loss. With leveraged trading such as spread betting, the risks and dangers associated with runaway losing positions can be disastrous to your spread bet account, and one wayward position might even jeopardise otherwise profitable positions elsewhere in your account as brokers seek to offset your losses. The markets can be unpredictable places to do business, and often traders will feel that in spite of their best efforts at logic and reasoning, getting a firm handle on market psychology and the behaviour of markets in relation to price data and extra-market affairs is nigh-on impossible.
This makes the need to mitigate risks at any cost vital to trading longevity, and even in the most apparently stable of positions, the risks of slight market movements (leveraged up to deliver significant losses) should not be underestimated. That’s where the stop loss comes in, as a tool designed to allow traders to limit their potential exposure in an otherwise unlimited liability trading style.
Whereas with regular trading, traders are limited in their liability to the extent of the original investment – that is, the worst case scenario is that the assets they have bought become worthless – spread betting poses unlimited downside risk, with no cap at any stage on the amount for which your position could be liable. This can and tragically has resulted in traders losing their personal assets, including their homes and businesses, so it’s of paramount importance that you pay serious attention to the management of risk, in which stop losses play an absolutely pivotal role.
How Stop Losses Work
Stop losses are designed to provide traders with a floor price at which their exposure and liability will be capped. A normal stop loss order is free to place but guaranteed stop losses must be paid for, and as a result represents an additional trading expense, guaranteed stop losses provide a much needed function for traders looking for peace of mind, and by capping losses at an automatic, defined rate, spread traders can be better equipped to plan future trading decisions and manage their capital. While the exact positioning of guaranteed stop losses is a balancing act between minimising risk and allowing a position breathing space to naturally fluctuate on its way towards profit, the knack of guaranteed stop losses is one that is quickly gained through experience of using the order.
Stop Loss vs Guaranteed Stop Loss: as mentioned above, stop losses are free and can be used on any trade; on the other hand, guaranteed stop losses cost extra money (normally, in the form of a commission) but guarantee exit at the specified price. For example, you spread bet on shares of ABC Plc (with stop loss at 80p) and after an unexpected announcement the share price plunges (and gaps) from 100p to 20p per share. With a regular stop loss, your position is closed at the best available price which is 20p per share (after the gap) thus your loss is bigger than expected. On the other hand, with a guaranteed stop loss your position is closed at your level, which is 80p per share. Mainly, guaranteed stop losses are used on small cap shares as liquid markets barely ever gap so there’s no need to pay for this guarantee.
Stop losses work by allowing the trader to establish a set price point at which their position will automatically be closed. This price trigger is set underneath the current market rate, such that if the market happens to fall beyond that price point the trader is insulated from any further degree of risk or liability. This is particularly important, given the impact of leverage in ramping up losses to multiples of the initial stake.
Suppose you held a spread betting position in the FTSE100 market that was sitting at 6000, on a £1 per point stake. Deciding you want to limit your exposure to £10, the stop loss would be set at 5990, to ensure that if the market fell to 5989, the spread bettor would already be cut out of the market to prevent any further risk or damage to trading capital. Stop losses are automatically triggered, so traders need not do anything more to close a position or mitigate against the risks of a certain position than execute their stop loss order at their chosen price point.
When To Use Stop Losses
Using stop losses on a consistent, regular basis is recommended, especially for new traders or for those without the capital to absorb a few heavier losses. Of course, this advice is tempered by the fact that guaranteed stop losses actually cost money, and eat away at the trading profits that can be expected from a particular trade. Nevertheless, many traders would agree that the cost of guaranteed stop losses is a small price to pay for guarding against significant downward turns in trading positions.
With this in mind, stop losses should be used as priority in more volatile markets, or in more uncertain trading positions where it seems as though the market might unexpectedly fall away. So, where a decision rests on an imminent announcement, such as economic data or a company’s trading results, traders can speculate on the direction of movement they anticipate whilst also taking care to guard against all eventualities.
Stop losses can also be introduced after a position has been opened as a sort of banking mechanism. If the same FTSE trade as in the above example saw a rise from 6000 to 6010, the bettor may position a stop loss at 6009 to ensure that £9 of profit was safely banked from the trade. From there, if the position moves down, that £9 profit is guaranteed. This effectively creates a risk free proposition for the trader, because any market reversal will be cut off before it starts to take hold, with any profits realised going forward an added bonus. And furthermore, this process of adjusting the stop loss level can be carried on to bank increasing profits as the position moves north.
Part of the beauty and attraction in spread betting is its capacity for unlimited upside gains. If a market rallies heavily in your favour, there’s no reason why a well positioned trade can’t deliver a return hundreds of times in excess of your original stake amount, and many a fortune has been made through shrewd financial spread betting. A corollary of this is that losses are also uncapped and highly unpredictable. While markets can be read and interpreted with some degree of clarity from experience and knowledge of all the relevant factors, that’s never a guarantee of actual performance, and even the brokers are completely in the dark as to whether a position will eventually move up or down.
At the same time, traders have the flexibility to profit from the markets in both directions, which essentially allows brokers to create a mini-market of their own. This means that even in downwards markets, traders can profit from selling a market that is falling away. In this event, the risks are still equally present – should the market rise, the trader will lose. On both sides of the coin, regardless of which camp a trader sits in, a reverse directional movement will accrue liability in the same proportion as always, factoring in the leverage effect.
The stop limit performs two key functions in the sense that it helps guard against the losses and cap the profits of positions on the upside, as a ‘limiter’ to what a position can achieve. In many respects it is very similar to the guaranteed stop loss, albeit residing in positive market territory.
How Stop Limits Work
Stop limits work in much the same way as stop losses, although they are distinct in the sense that they reflect a ceiling price, rather than a floor price, at which a position will be closed. On first reading, this might seem a little counter-intuitive – why would you want to cap earnings that are potentially unlimited? The answer is that stop limits are a slightly more nuanced issue, and their use is applicable to a number of varied and distinct circumstances.
Firstly, stop limits are used as the converse of stop losses in protecting against losses in short positions. When a spread bettor sells a market, a rise in that market is effectively a loss for the trader – even though the market is performing well – because the trader has staked against the market performing well. So, in the same way in which stop losses guard against runaway liability in buy positions, so too do stop limits guard against risks with sell positions.
Stop limits can also be used in the same way as stop losses in banking profits as you go, or can be implemented as a cap in a position’s lifecycle at the point at which traders anticipate a reversal, such that the perceived maximum profit point is defined and the position automatically closed when the market reaches those heights. This can be an effective way to make a satisfactory amount from a trade while also notionally freeing up capital to trade in other markets and on other opportunities. Assuming the stop limit is set at a sufficiently high level, this can be an effective strategy for automating the trade.
When To Use Stop Limits
Like their stop loss counterparts, guaranteed stop limits are a cost centre for traders to take into consideration, and this must be factored in to any equation – whether the stop limit is being used as a safeguard against loss or used to shore up profits. It is advisable to take all possible steps to mitigate your exposure to risk at all times during spread betting, but that’s not to suggest that guaranteed stop limits should be positioned in every single short position you take.
In fact, guaranteed stop limits should be used more readily in markets where the decision to sell is more highly speculative, and where the market could in reality easily turn in either direction. This requires a careful consideration of all the often-complex factors that weigh-in in deciding how a market moves, and an objective analysis of the probabilities of the market moving in a direction that opposes your research and reasoning. If a position relies on some unknown variable and there are suggestions from price data that a market might move outwith its traditional range, its generally a good rule of thumb to make sure you’re guarded with a guaranteed stop limit in place.
Good Till Cancelled
Spread betting positions are opened on the assumption that they will remain open until such times as they are closed, or at such point as the market closes up for the day’s trade. In the same way that market on close orders allow traders to stipulate an end to their positions at the closing bell, good till cancelled orders (GTC) enable traders to cement positions more rigidly with their brokers, guarding against premature closing and ensuring that a position will remain held until such times as the trader decides it no long makes economic sense to do so.
GTC orders are fairly simple to understand in concept, and they provide traders with the means to automatically sure-up their open positions. This is vital in guarding against risk exposure and ensuring profitable positions can be maximised to their fullest extent – a critical part of ensuring an aggregate trading profit across a wider portfolio. While GTC orders can do nothing to interpret or respond to the movements of the market, they do nonetheless play an extremely important role in allowing traders to guarantee their exposure to a market for as long as they desire, factoring in the natural breaks in positions at the end of each trading day.
How ‘Good Till Cancelled’ Orders Work
Good till cancelled orders are applied to positions that traders want to hold indefinitely – that is, positions that they especially don’t want to be valid for only one trading day. A good till cancelled order means that a position will with certainty run on and on until the trader actively cancels the position. While this might be beneficial in enabling longer-term profitable positions to run and run, it’s essential that traders understand the additional costs and risks they are absorbing by doing so.
Indeed, not only do overnight positions attract additional costs and risks, but also the sheer virtue of GTC orders holding permanent positions means that traders must remember to close their positions eventually, or risk racking up massive losses as a result of a simple error. For this reason, it is arguably best to implement GTC orders alongside other orders and triggers, to offer the best degree of protection for your positions.
When To Use ‘Good Till Cancelled’ Orders
Good Till Cancelled orders are best implemented in positions that you think will run upwards over a slightly longer time period. Spread betting in essence is a short term trading style, with financial disincentives to hold positions overnight, including additional finance charges. However, where the economics of the trade make sense, a GTC order can be a good way to ensure your position remains open for as long as it needs to, and that your leveraged earnings can continue to grow over the lifetime of the position, and it may well be the case that you forecast a more significant growth in a market over a period of a couple of days or more which would necessitate a GTC order to allow the position to fully run its course.
While the practical implications of different orders might take a bit of getting used to, its guaranteed that with exposure to the markets and real trading experience, you will better understand how these work and the situations in which they can best be of use. There are an array of different order types accessible to spread betting traders – the trick lies in understanding and interpreting which order (if any) is most applicable to a given trading decision.
One of the most important considerations for anyone contemplating spread betting is management of risk, particularly given the degrees of leverage involved in each transaction. Whereas a cash transaction might move at most a percent or two in a day, spread betting transactions are vastly more volatile, simply because of the multiplier effect of the transaction. A widely used (and much sworn-by) strategy for limiting this exposure to risk is to set stop losses – automatic orders to close out a position at a certain degree of loss in order to cap your liability.
But traditional stop losses are not without their flaws, and they do little to protect profitable positions from evaporating, without being reset continually in line with market movements. That’s where trailing stops come in, providing traders with the same base functionality of stop losses but with an additional layer of flexibility to meet with the needs of moving positions.
What Are Trailing Stops?
Trailing stops are essentially much like regular stops, but with one crucial difference. Where regular stop losses set a defined, fixed bottom (or top) end to minimise your liability, trailing stops (as the name might imply) introduce more fluidity into the loss level as the market moves in your favour. This has the effect of shifting the stop upwards when it is to your benefit, in order to effectively capture your profits as the market moves more in your favour.
Say, for example, you buy the FTSE at 6000, with a stop set at 20 points beneath. If the market rises to 6100, your stop remains at 5980, until you manually reposition it, which means that you could still lose 120 times your original stake.
Take the same example, but with a trailing stop set at 20 points beneath. If the market is flat, your stop will stick at 5980 as before. However, when the market rises to 6100, your stop will rise alongside it, to 6080, thus ensuring that the maximum you can ever lose is 20 times your stake from the market value. So, if the market then turns around, heading towards the 5980 mark, you’ll be safe with your position having been closed in profit, 20 points behind the highest point of the cycle.
Why Use Trailing Stops?
Trailing stops provide an excellent guard against market reversals, and are far more practically useful than their fixed counterparts in terms of their readjustment affect. As the market rises, your profits are effectively banked as you go, without sacrificing any of your position – by keeping a constant check on the degree of market reversal necessary to trigger the close of your position, trailing stops are a highly effective way to limit your risk profile.
Trailing stops aren’t the answer to avoiding risk in spread betting, but they can go a long way towards helping curb the possibility of a crippling market reversal. Particularly for positions you don’t intend to watch 24/7, the trailing stop can be a helpful way of squeezing the maximum profit from each given trade, while providing a safeguard against losses.
One Cancels The Other
Beyond the basics of limits and losses, there are a handful of additional, slightly more complex but nevertheless useful orders that can be applied to different trading situations. Market movements can only be forecast, and the reality of the situation is that even institutional investors and academics cannot call with any degree of certainty the behaviour of the markets when all the variables are factored in. This places a premium on dynamism and the ability to respond effectively to changing market conditions, with relies on strategic planning and putting contingency measures in place to deal with potential market movements ahead of time. While responsive trading throughout the day requires constant attention and monitoring of market developments, there are alternative measures that can be put in place to help shape trading portfolios come what may, without the need to be chained to the trading desk 24/7.
One of the ways in which this sort of contingency planning can be put in place is through the effective use of one cancels the other orders (OCO), which enable traders to take multiple conditional decisions ahead of time. By implementing OCO orders, traders can decide that in certain market conditions, one particular order should prevail and cancel another future order, to provide more responsive, automated trading that turns on the basis of market outcomes and gives more control to the trader in ensuring the right positions prevail in any market condition.
How One Cancels The Other Works
The unpredictability of the markets makes it important for traders to attempt to cover all the bases, and this is particularly the case for traders with a cautious risk appetite – whether as a result of a cautious investment strategy or a need to preserve trading capital at all costs. This is where OCO orders come in, as a means of enabling traders to factor in decisions for different trading outcomes, so that their trading will is still executed automatically regardless of the market outcome.
One cancels the other orders work by establishing a link between two separate orders that are already in place, such that they are each conditional on the satisfaction of the other order. If one order is fulfilled, it cancels the other order and executes the trade accordingly. This means that traders can specify their preferences, taking into account that markets might rise or fall and that the trading situation may well deviate from their research and rationale. And as a free order in its own right, one cancels the other orders can be implemented cost effectively to provide a greater degree of certainty over the response to either a rising or falling market.
When To Use One Cancels The Other
One cancels the other orders can be used in a number of ways to establish conditional trading decisions that are designed to automatically override corresponding and often contradictory orders. In practice, this means that traders can take measures to ensure that if one order isn’t realised or doesn’t crystallise according to the changing market environment, an alternative order which is more suited to the eventual outcome can take hold, cancel the first order and execute the will of the trader. Effectively, this means that traders can stipulate two separate orders at different times, in order to instruct their trading in consideration of potentially different outcomes.
One of the most common situations in which OCO orders are implemented is in conjunction with a pairing of a guaranteed stop loss order and a guaranteed stop limit. This has the role of effectively narrowing the scope of the trading cycle, such that if the markets perform well a profit can be banked automatically at a defined level, or if they perform badly losses can be capped at a predetermined rate. While this does have the effect of taming the markets slightly in the sense that profits and losses are enclosed, it can deliver significant advantages to traders who are looking to take advantage of the benefits of spread betting without being prepared to absorb the full degree of risk spread betting naturally brings.
Market On Close
Spread betting positions run on single trading day periods, with those still standing at the end of the day subject to a rollover to the next trading day. Rolling over positions subjects otherwise strong trades to the heightened volatility of market close and open, in addition to attracting extra charges, which can make already unpredictable markets behave even more unpredictably. With orders such as market on close orders (MOC), traders can automate their positions to close out in a timely fashion unless the trader actively chooses to do so at any prior point, safeguarding the security of their trading portfolio overnight.
Automating the trading process is, to a large extent, the core benefit of different order types, which act to safeguard trading decisions and enable traders to make critical calls ahead of time to protect their trading account. With MOC orders, traders can do exactly that, ensuring that all the metaphorical t’s are crossed as they progress towards a new trading day. A free order to implement, amend and cancel, MOC orders can be a highly useful addition to the trader’s toolkit, and are used widely by private and institutional traders alike as part of a wider approach to risk management.
How Market On Close Orders Work
Market on close orders are very simple in practice, and act as an automatic cap on the duration of a particular trade. If positions are left open to roll over to the next day, traders will incur additional charges from the broker in the first instance, in addition to having to weather the unpredictability of the opening stages of morning trading the next day. With other major world markets playing out beyond the closing point of the UK trading day, markets can behave in a very volatile manner as they adjust and respond to goings on around the world. Thus the market close order can be put in place to simply shut out the position at the end of the trading day, whether at a profit or a loss, in order to clear the slate for the next day’s trading.
Of course, market on close orders can also be implemented in conjunction with other orders, for example stop losses, so that traders can still protect against the risks of wayward positions while retaining the ultimate security of closure at the end of the present trading day.
When To Use Market On Close Orders
Market on close orders are best used to clear the desk at the end of the trading day, so it pays to use these orders when opening positions you’re sure you want to wrap up over the course of the present trading period. As a rule, most traders tend to close the majority of their positions before the day is out, because the defined break in trading sessions means that the position would otherwise have to roll over, and confront the rampant volatility of the market open the following morning. But as portfolios become larger and the number of positions you are engaged in increases, remembering to close down all positions before the close of the day can become an increasingly more tiresome and awkward burden – particularly for part-time traders who may not have the capacity to monitor their positions constantly throughout the day.
Market on close orders are free to implement, and so can be used very swiftly and effectively to ensure all the loose strings are tied up by the end of the day. Of course, there may be circumstances under which it would be beneficial not to close a position on the close of the market, in which case the MOC can be cancelled, or avoided if it is known in advance that the trader wants to roll his position overnight. However, by making use of the automation that MOC orders provide in ensuring all open positions are settled, traders can more effectively guard against the risks of holding on to positions for too long unnecessarily.
Orders are defined very rigidly in the functions they carry out, much in the same way as a software programme is designed to serve one particular purpose. This means that traders, having learned the various different types of orders and what they do, can communicate directly with the broker in a certain, defined way, to avoid unnecessary delay and ensure traders convey exactly what they want to happen to their trading positions.