Spread Betting: is it better to use Ordinary Stop Loss Orders or Guaranteed Ones? - By: Andy Richarsdon

Limiting Losses: Spread Betting Stop Orders

Protection and preservation of your funds should be your first priority when spreadbetting. It is really very simple; if you are wiped out, how can you trade? If you trade on margin you should definitely use stop loss orders. Stop losses are the most basic risk management technique available to you free to charge; it is about placing a stop on your position to limit the downside. Stop losses are for traders that may actually want to live to fight another day and placing stops is an important part of protecting and preserving your capital.

Psychology and Stop Losses

Losses are only unlimited if you sit there like a chump running your losses forever and a day. You can always cut that position and take that loss. People lose money because they continue watching their positions go from bad to worse to plain in the hope that things will turn round. But sometimes, you just have to bite the bullet and close that position.

Somehow I think it all boils down to investment psychology. I feel that a lot of people have a hard time putting on stops because it is an ego thing. They are afraid to be proven wrong in their decision so they would rather not put a stop loss and say: 'Well, if it hits there, then I'll definitely get out.' Unfortunately 99% say that they will, but they don't. Unfortunately, a lot of people associate that loss with being poor husbands, poor wives, poor people in their job.

Are Guaranteed Stop Loss Orders Worth the Extra Premium?

Some spread betting providers will even offer guaranteed stop losses. Now, a guaranteed stop loss does not apply to every single stock out there in the market. It only applies to, in the case of the UK shares, to say FTSE 100 shares. And normal stop loss orders are free but guaranteed stop loss orders carry an additional charge. Here, you are buying yourself an insurance premium and you're going to have to pay for that. So there is a difference and the reader has to differentiate between a stop loss, which just covers the normal day-to-day of getting stopped out, or the extreme case scenario where something goes wrong, and you have a guaranteed stop loss. But that involves a premium, a wider spread when you are shedding the bet.

Obviously, all spread betting provider offer ordinary stop losses but some providers may not offer guaranteed stops as they represent an unhedgeable risk for them. One of the ways that a spread betting firm might find itself insolvent is if it suffered some absolutely cataclysmic market event that put it under.

Whether you use a guaranteed stop or a regular stop is entirely up to you. The most important point here is that you have to take a view on how much you're willing to risk per position you take on.

About the Author

Andy published a day trading guide for spread betting

Article Directory Source: http://www.articlerich.com/profile/Andy-Richarsdon/78245

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