Spread Trading Orders: Trailing Stop

The trailing stop order is a very useful one, and is a way of hanging onto most of your spread betting gains. When you set an ordinary stop loss, it just sits there. Say you bet on the UK 100 at 5890.0, and your stop loss was set at 5777. You might see the price rise to 6500, but if it dropped again and you hadn’t closed the spread bet all that profit will go, and you might even still be closed out at 5777 or thereabouts.

Now that’s a shame. You so nearly had a lot of profit, but you waited, perhaps thinking it was going to go higher, and before you knew it, it dropped back and finishing as a loss. If you have been sitting at your computer, you could have kept going back to the trade and setting the stop loss order higher so that you locked in your gains, but who has time for that?

If your spread betting company offers a trailing stop order, and many do, then you can automatically lock in most of your profits. The idea of a trailing stop order is that it is a stop order but the value for it changes according to the market price. For a long order, the stop order will be continuously updated to be a set distance less than the market, but the price on the stop order will “ratchet” so that it never comes back down. If the market price comes down, the stop order stays where it is and you are stopped out with a decent profit.

Let’s assume the following scenario: You place a spreadbet on the UK 100 at 5890.0, and your initial stoploss was set at 5777 by the bookmaker. Suppose you now placed a trailing stop order setting the loss at 20.0. Note that this value is not a recommendation, what you need to do is examine how the price moves and decide for yourself how far down to set it.

Back to the example. Your trailing stop now will stop you out at 5870.0 if your bet goes straight down. Again, the price you will get is not guaranteed as it will be sold at market, but should be about there. Say the price goes up to 6000, then back to 5990. Well, 6000 was the highest, and 20 off that is 5980, so the trailing stop order will be at 5980. When the price comes back to 5990, the trailing stop stays where it is. So the trade is still open, and might go back up.

If the price goes all the way up to 6500, as suggested in the first paragraph, the trailing stop order will follow and be set at 6480. So if the price now plummets you have a stop order at 6480 and will retain most of your profit. As you can see, the trailing stop order can be very useful, even though it will not take you out of the top – but there is no way of doing that, anyway.

Trailing stop orders are definitely worth looking into, as you don’t have to be continuously monitoring the price but you get to keep most of the gains if the price reverses. You have to balance the distance away from the market price so that it is large enough that minor fluctuations don’t take you out when the price may keep on going up, but not so large that you lose most of your gains.