Stop Orders

It is often said that financial spread betting lies at the more speculative end of the investment spectrum and this is certainly true.  Rewards and profits can be huge, but without sensible risk management losses can accumulate as quickly as gains. Certainly one should only spread bet with money that one could afford to lose but this is only one side of the story.

The fact is that market volatility means both risk and opportunity. For example, it is not unheard of for the FTSE or Dow Jones to swing by over 150 points in a trading day and while these large price fluctuations can result in bigger profits, they could also mean larger losses if you are on the wrong side of the trade. Ultimately, with trading and margin trading in particular protecting your capital is the most important thing and this is where stop losses and stop loss orders come in play. With a £2 a point spreadbet on the FTSE trading at 6,000 you have a ‘notional’ position of about £12,000 meaning that you would in theory stand to lose £12,000 if the FTSE dropped to zero. Spread traders can however setup a stop loss level which caps the potential downside by automatically closing the bet down if the spread touches a determined level.

Most spread betting providers support a range of automated orders that enable you to leave an instruction to trade should a certain specified price be met. Orders in this respect are simply trading tools that allow you to automatically open, close, or amend your spread bets at preset prices. Which means that one you have set up your limit or stop orders, you do not need to be stuck in front of your computer screen to carry out your spread betting strategy. This provides additional control and allows for a new spread trade to be opened or an existing position to be closed, with the main tools consisting of stops and limits.

Successful traders are disciplined and tend to follow a trading plan religiously. The most experienced traders make regular use of stop and limit orders and contingent orders. While beginners tend to shy away from the apparent complexity of some the more advanced order types, the sensible placing of stops and limits, can make all the difference between success and failure.

Types of Stop Orders

Traders and investors who are unable to book profits or cut losses because they are unable to get online or call their spread betting company in time to buy or sell can avoid this frustration and do away with the stress by utilising limit and stop orders. This is where you tell your spread betting provider in advance you would like to buy or sell at a certain level – both entering and exiting a trade. The name ‘stop loss’ is actually a bit misleading because you can set a stop to lock in profit as well as control losses.  Such benefits include the ability to set up a buy order to get in cheaply if you think a share is about to drop in price, or to automatically sell when your desired profit level has been achieved.

When you tell your spread betting broker what bid you want to place, this is called an ‘order’. If you do it on the telephone, you will usually find that the conversation is recorded so that it can be confirmed later if there is any question. When you ask for a quote, never tell the financial bookmaker which direction you are thinking of betting, simply ask for the ‘FTSE 100’, for instance. When quoting, the bookmaker may simply say ‘FTSE 100 5701/5703’. Don’t expect him to say ‘Sell is 5701, and buy is 5703’, as you are expected to know that.

Placing a bet is then as simple as saying, for example, “I will go short on the FTSE 100 at £5 per point”, which will be repeated back to you. If you don’t like the quotes offered, and don’t want to bet, you can just simply say “Nothing done”. Keep the conversation short and unambiguous.

If you are placing your bet online, which is the method you will probably use the most, the exact process will depend on your trading platform. You will enter the amount you want to bet, and click on “Buy” or “Sell”, or similar words. The price fluctuates, so you need to move quickly when you see an opportunity. Some platforms will freeze the price after your initial click for a period of seconds, so that you can confirm it is what you wanted.

There are several variations. Here are some brief descriptions of the stop loss orders that are available with most spread betting brokers nowadays -:

• Stop orders – usually placed to cap losses on a position in the event of an adverse market movement.
• Limit orders – normally placed to take a profit on a position in the event of a favourable market movement.
• Besides stop and limit orders we have linked orders consisting of OCO and If Done orders. These consist of -:
  1. A limit order to open the spread trade when the market hits the right price.
  2. A limit order to close the spread trade again to take profit should the market move in the direction you anticipate.
  3. A stop order to close the spread trade to limit losses if things go wrong.
• One-cancels-the-other (OCO) orders – Additionally, if the take profit and stop loss orders are both active in a market at the same time, when one of them executes, the other order will still be left hanging around and could execute an unwanted trade. To prevent this an OCO order is used. This is where two orders are left at the same time, above and below the current market level. If one is triggered then the other is cancelled.
• A Contingent (or ‘if done’) order – where a stop or limit order is placed and, ‘if done,’ a second order is automatically set against the new open position. Why is this order needed? Take profit and stop loss instructions should not be placed at the same time as the entry order as they might be triggered before it leaving you in an unpredictable trade. These orders should thus be placed if, and only if, the entry order executes. This can be done if we link the take-profit and stop loss orders to the entry order in an If done arrangement.

• Guaranteed stop losses – offered by some spread betting companies. For a small premium, and subject to certain criteria, a guaranteed stop loss quantifies any potential loss in any circumstance.
• Trailing stop – offered by some spread betting companies. This is an instruction to Sell if the price falls back from its peak price by your pre-set margin. This is a useful way of locking in gains if a rising share price loses momentum and starts reversing. You typically set either a target price or a target percentage profit level.

Important: Normal stop loss orders are free to place but they only activate at the next tradable price once an order has been triggered, which leaves spread trades prong to the risks of gapping or slippage. This is because as opposed to limit orders, stop orders are transacted when the market reaches or breaches a price level but there is no guaranteed that you will be filled at that price. When the price hits or breaches your specified stop loss price level, stop orders become market orders and are then filled at whatever price is prevailing in the market. So if there is limited liquidity in the market (say, there are just so many shares at the stop price you specify), your order may be filled at a worse level. This uncertainty is sadly a reality of the market but nonetheless it is still bad news when you are attempting to protect yourself from losses. Some providers offer guaranteed stops which offer extra security but these usually come at a premium. Guaranteed stops provide certainty that your positions will always be exited at the set level irrespective of whether the market really trades at the indicated price.

• Normally stop loss orders are utilized to cap losses if a market heads in the wrong direction of your trade. For instance if you holding a short spread betting trade, you would place a spread betting stop order to buy at a price that is above your entry level to close your spread trade and limit any losses.
• Another use of stop orders is to wait for a market to change direction. So you could place a stop order to open a long spread trade if the market is trending in the right direction and the price moves above the prevailing price.

Other Settings – Level Basis:

Some providers will allow you to place orders basis on ‘Our Quote’ (the provider’s) or ‘Market’. By default all orders are placed ‘Our Quote’. With some providers this can be changed to ‘Market’ by clicking and choosing ‘Market’ in the level basis drop down.

The difference between ‘Our Quote’ and ‘Market’:

Orders placed basis ‘market’ will only potentially become a trade when an actual trade in the underlying market has occurred at or through the order level, spread will then be added to the price to give the fill price. Whereas orders placed basis ‘Our Quote’ will potentially become a trade if the order level is reached by ‘Our Quote’ (the provider’s), inclusive of the provider’s spread. FX and Daily rolling indices can only be placed at the provider’s quotes.

Every product (FX, shares, etc) has a bid and an offer (as someone is always willing to buy and someone is always willing to sell) and a spread betting company will always show both prices, this is known as ‘Our Quote’. The prices can move up and down without there being an actual trade in the underlying market due to market participants adjusting their levels.

All the prices you see on the trading platform are ‘Our Quote’, they already include the spread. For example BP shares underlying ‘bid – offer’ is 574.5 – 574.6. For ‘our quote’ the provider might subtract a fixed mark-up like 0.1% from the bid and add 0.1% to the offer, therefore on the trading platform BP daily rolling cash will be 573.93 – 575.17.

Other Settings – Order Life:

• Orders are placed by default GTC, ‘Good Til Cancelled’. This means that your order will be continually watched whilst a market is open until you cancel the order. An attached order will also be cancelled if the trade it is attached to is closed.
• Orders can also be left GFD, ‘Good For Day’ in which the order will be cancelled at the end of the calendar day or GTD, ‘Good For Date’ where you can specify the date you want the order cancelled.

Note that besides normal stop orders there are also other type of orders allowing you to set limits on the prices at which you are prepared to sell or buy. This essentially means you don’t need to monitor a stock and look at a screen continuously and can effectively keep trading when you’re on holiday or at work.