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Casual Articles - The Importance of Using Stop Loss Orders When Spread Trading the Financial Markets
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You can also lose more than you wished if the market you are trading "gaps".
For example: You have opened a long trade on the Dow Jones for ?1 a point at 10000. As you were willing to risk ?200, you placed a stop at 980
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Stop losses are market orders designed to allow you to limit your losses.
When you place a stop loss you are instructing the spread betting company or stock broker to cut your position when it reaches a certain loss level (or in some cases, profit level - more later).
Therefore, a stop loss will automatically close your trade if the market reaches a certain point.
For example: You have bought ?1 a point of the German DAX at 4200. The most you are willing to risk is ?150 on this trade so you place your stop at 4050. If the market trades at 4050 you are taken out immediately and you lose ?150.
Normal Stop Losses
These are free but with this type of stop you can sometimes lose more than you specified when you placed the order.
Sometimes your stop loss order may not be filled at the level you wanted i.e. you may be taken out at 4046 instead of 4050.
The bookmaker will attempt to get you out of the trade at the price you specify but when the market is moving very quickly it may not be possible.
This is called "slippage" and tends to happen in a fast moving market.
You can also lose more than you wished if the market you are trading "gaps".
For example: You have opened a long trade on the Dow Jones for ?1 a point at 10000. As you were willing to risk ?200, you placed a stop at 9800
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Therefore, a stop loss will automatically close your trade if the market reaches a certain point.
For example: You have bought ?1 a point of the German DAX at 4200. The most you are willing to risk is ?150 on this trade so you place your stop at 4050. If the market trades at 4050 you are taken out immediately and you lose ?150.
Normal Stop Losses
These are free but with this type of stop you can sometimes lose more than you specified when you placed the order.
Sometimes your stop loss order may not be filled at the level you wanted i.e. you may be taken out at 4046 instead of 4050.
The bookmaker will attempt to get you out of the trade at the price you specify but when the market is moving very quickly it may not be possible.
This is called "slippage" and tends to happen in a fast moving market.
You can also lose more than you wished if the market you are trading "gaps".
For example: You have opened a long trade on the Dow Jones for ?1 a point at 10000. As you were willing to risk ?200, you placed a stop at 980
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Normal Stop Losses
These are free but with this type of stop you can sometimes lose more than you specified when you placed the order.
Sometimes your stop loss order may not be filled at the level you wanted i.e. you may be taken out at 4046 instead of 4050.
The bookmaker will attempt to get you out of the trade at the price you specify but when the market is moving very quickly it may not be possible.
This is called "slippage" and tends to happen in a fast moving market.
You can also lose more than you wished if the market you are trading "gaps".
For example: You have opened a long trade on the Dow Jones for ?1 a point at 10000. As you were willing to risk ?200, you placed a stop at 980
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The bookmaker will attempt to get you out of the trade at the price you specify but when the market is moving very quickly it may not be possible.
This is called "slippage" and tends to happen in a fast moving market.
You can also lose more than you wished if the market you are trading "gaps".
For example: You have opened a long trade on the Dow Jones for ?1 a point at 10000. As you were willing to risk ?200, you placed a stop at 980
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You can also lose more than you wished if the market you are trading "gaps".
For example: You have opened a long trade on the Dow Jones for ?1 a point at 10000. As you were willing to risk ?200, you placed a stop at 9800. Over the next couple of days, the Dow moves down slightly to 9900 and at the end of trading on the third day it is sat at 9890.
The next day some very disappointing economic figures are released and the Dow opens well down at 9700. As this is past your stop loss, the bookmaker closes your bet at market price.
Your trade is closed at 9690, 110 points below your stop loss so your loss is now ?310 rather than the ?200 you were willing to lose.
Guaranteed Stop Losses
You can ensure you are closed out at the exact price you specify by using a Controlled Risk or Guaranteed stop loss order
These types of stops are designed as a type of insurance to guarantee that your stop loss order is filled at the exact price you specify.
Even if the market you are trading gaps 1000 points beyond your stop, if you are using a guaranteed stop loss you will still only lose what you have already decided is an acceptable loss.
You pay a little extra for a guaranteed stop. In the Dow example above, a guaranteed stop would cost roughly 4 times the stake (4 x ?1 = ?4). Usually the premium is taken from
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