Spread Trading Orders: Guaranteed Stop Loss Order

As mentioned above, the alternative to the stop loss order is the guaranteed stop loss order. This has advantages and disadvantages. Many newcomers to spread betting get worried that the stop loss order might be filled at a price very different from where they set it, and are eager to use the guaranteed stop loss order.

In some cases a market may move straight from its present level to another one beyond your stop-loss. For instance, you go short of a share at 60p with a stop-loss at 63p. The next day, it leaps straight from 60p to 66p, leaving you with a loss twice as large as you’d bargained for.

In return for paying a sub charge, spread betting firms can guarantee that you will be stopped out at the price you expected, regardless if the market prices gap. However a guaranteed stop isn’t necessarily always a good thing. As the name implies, the guaranteed stop loss order will guarantee the price at which you will be out of the bet, regardless of what the market is doing. That sounds good, but you pay for the privilege. If you want a guaranteed stop loss order you must say so at the time you open the trade, and you will find there is a much wider spread or profit for the dealer.

Why is this? It’s obvious if you think about it, if the dealer is going to guarantee the price regardless of what the market does, he’s effectively becoming an insurance broker and the wide spread represents the cost of the insurance. Ultimately, the price has to come out of his margin if it’s not in the market, and he has to cover himself. The dealer’s way of getting any payment is the spread, as there are no commissions charged.

The problem I see with this is that you pay for the guaranteed stop loss whether or not it is used. You can be paying for the guarantee with a wider spread on all your trades, and all of them go the right way. You’ve got nothing out of it, and simply reduced your profit by suffering the wide spread.

That said, while I wouldn’t generally recommend using a guaranteed stop loss order for all your trading there are times when you might want the safety that it offers. It would depend on circumstances, and on the volatility of what you’re trading. It’s worth considering using a guaranteed stop loss order, but if you make a habit of it you will find that your profits are diminished.

Incidentally, at least one spread betting provider offers a beginner’s account where the automatic stop losses are all guaranteed.