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How do stop losses work in spread betting?

How do stop losses work in spread betting?
Asked by
Benjamin Schmitz categorie-icon time-icon5 months ago
1 Answer Answer Question

Justin Freeman
Answered time-icon5 months ago

Stop losses are automatic buy or sell instructions built into open positions you hold. If you are long on an asset then the stop loss will sell it and close out the position should the price reach a certain level. Stop losses are used to manage risk and are an acceptance that no trader wins on every trade. By applying stop losses you can calculate what the maximum loss is on each trade and manage the psychological and emotional element of trading.

Effective risk management requires stop losses to be applied at time of trade or else you’ll be running a ‘naked’ position. The execution interface will have options to Buy and Sell and, if you’re using a reputable platform, the option of setting Regular or Guaranteed stops. The latter offer a little more security as if the market ‘gaps’ and prices move past your stop level rather than ‘through’ it then the stop loss price will still apply. There is a premium paid for applying a guaranteed stop loss, but this is only charged if the stop is actually triggered.

The level at which you place your stop loss is a critical part of trading. Common guidance is that your strategy should involve stops being put at a level so that no more than 2% of your total trading capital can be lost on any one trade. Taking this to a higher level, if your strategy signals trade entry points that are near to support and resistance levels then stops can be placed just the other side of these. Should price action break through the support or resistance level then it is likely to carry on going,so taking a loss sooner rather than later will minimize your losses.

Depending on your choice of broker the execution interface may illustrate the cash value of the stop loss being triggered. This is a useful double check and worth giving some time to. If you are completely new to spread betting you may also want to try putting on trades in a dummy account environment. This will allow you to familiarize yourself with the basics of how to build a trade instruction.

Trailing stop losses involve the stop moving up to follow price action on successful trades. As your position moves into profit the stop also moves. These can guarantee that trades that are in profit don’t turn into loss-makers.

The temptation to intervene and move stop losses away from where you set them is to be avoided. That is a surefire way to blow up an account.

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