So now you know how to spread bet, and it doesn’t seem too difficult, does it? Well, we’re just getting started, and there is a lot more to know unless you don’t mind losing money, and that’s really not why you are reading this guide, is it? To summarise, you know the mechanics of betting, and that’s all. In fact, you don’t even know all those yet, as I’ll explain in this Chapter. There are some very useful things that you can do when you place a spread bet that help you preserve and grow your capital.
The main theme of this chapter is the types of order that you can give your spread betting bookmaker. When you tell your spread trading company to buy or sell a bet, you are giving him an order, but you can do this in several different ways. Not all spread betting providers allow all types of order, but most will have the ones you really want to use – a lot of the time you only need a few. Here are the different types of order and order modifiers.
The simple market order, which is the most obvious, can be used to enter or exit a bet. This is what you will get by default if you just click on the button. The market order instructs your bookmaker to place your bet at whatever the price is when he receives the order. Usually this will be the price you see on your screen if you are betting online, but it doesn’t have to be because that price changes all the time, more with some trades than others.
When you place a market order to buy or sell you are telling your spread betting provider that you are happy to accept whatever price is current when he gets the order. In the example in the last chapter we placed a market order, telling the dealer just to do it.
You may sometimes want to use a limit order. This sets a limit on the price you want to pay, or the price you want to sell at. You have to enter this price when you enter the order. Normally the limit price will be a little below the current price when you want to buy, or little above the current price when you’re selling.
Let’s assume we bought bought the UK 100 via a spread bet at 5890.0. If we use a limit order we could say in effect, “I think 5890 is a little high for the UK 100, but I’d buy it if it dropped to 5885”. We could put a limit order in at 5885.0, and just leave it. If the price dropped to 5885, then the order would happen and the bet would open at that level. If the UK 100 kept rising and never went down to 5885, then the bet would never happen, and we’d be left thinking that we wished we’d bought it anyway at the current price!
It’s very similar when you’re selling. We could set a limit order for closing the bet, and provided the price went that high, the bet would close and we would make a profit. If the price never got there, then you might be left holding an open bet that is losing which would not be so smart. But you can also use the limit order to enter a short position, selling if the price gets up to a certain level.
Sometimes there are reasons that you want to use a limit order, depending how you think the price is moving, and you should be able to find a limit order with any spread betting provider.
Good Till Cancelled
Just before we get to the stoploss order, or stop order, which is the most important order type will discuss in this section, it may have occurred to you that you could place a limit order one day and forget about it for a couple of weeks if the price never moved to trigger it. Then suddenly you would find a bet opening in totally different circumstances from those you were thinking of when you placed the order. It could also interfere with your margin calculations and prevent you entering another bet that you wanted.
That is why you need to know of two order modifiers. The first one is called Good Till Cancelled or GTC. This is used to place an on-going order, which has not yet become a trade, if you want your spread betting provider to keep trying, as for example when the price is not yet been reached for a Limit Order. The order would stay open in theory forever, although usually there is a practical limit that your dealer would apply, such as a month or two.
Good For The Day
The alternative to the GTC is the Good for the Day (GFD) order modifier. If you use this modifier when you place your order, it tells your dealer to only try to satisfy the order on the trading day in question, or the next trading day if the markets are closed. After that, it goes away and is forgotten. If you are placing orders which may not be executed straight away, such as the Limit Order or other orders that we will look at later on, this is the safest way to make sure you are not caught out by forgetting about them.
Stop Loss Order
Now we come to the stop loss order, sometimes simply called a stop order, which is one of the basic tools for your trading. A stop loss order is activated at a level when you have decided that enough is enough, you need to stop the losses and exit the bet. Basically, if you are in a long position but the price drops the stop loss order cuts your losses and closes the bet; if you have gone short or sold, then the stop loss order would take you out of the bet if the price rises to the level you set.
Now you might think it’s being defeatist putting out a stop loss order – after all, you only need it if your bet is losing. That’s precisely the point. People who win at trading aren’t necessarily those who concentrate on winning, but those who make sure they don’t lose too much. There’s a lot more to say on this topic, and that will come up in a later chapter.
When you use a stop loss order, you are telling your bookmaker in advance at what level you think your trade has gone wrong and lost you enough, so you want out. Often when you pick your trade you have a good idea where you expect the price to go, and you also have a good idea of the opposite, how far it can go in the wrong direction before you decide that what you thought was going to happen, just isn’t. That’s one way you can set the level for your stop loss order. It depends on your trading plan and trading strategy which we’ll talk about later – some people will just say a certain percentage of loss or a certain amount of loss from your entry price. The important thing is to make sure that the loss is something you can stand, and won’t cripple your account.
Some people think that you can just have a price level in mind, and if your bet goes against you, you will just exit the trade then. This is a very dangerous way of thinking. Apart from the fact that it requires your attention all the time to see what the price is doing, it’s very easy to rationalize staying in a bet. After all, you didn’t make the bet thinking it was going to lose, so it’s easy to think that the price moving in the wrong direction is just a temporary glitch, and it will turn around. But if you find it hard to take the loss now, just imagine how much more difficult it will be if the price continues moving in the wrong direction! Later on we will discuss in greater depth the mental side of trading, but be assured it is one of the most important aspects.
There is another school of thought that says that sometimes prices are manipulated if you put your stop loss on the market. The idea is that your stoploss order, once known, can be triggered by the price being made to shoot down, just before it takes off in the right direction. This can happen in regular stock market trading where the market has what is called a Level II screen, where everyone can see all the pending orders, and it could also happen in spread betting where usually your dealer is in charge of the prices that you see.
It’s really a choice of the lesser of the evils. If you’re prepared to write down your stop loss levels, so you don’t cheat yourself, and keep an eye on all your trades, then you could do it manually. But the consequences of missing a trade exit and incurring large losses could be that you lose your trading account, so on balance it is probably better to use stop loss orders. Unless you are a high roller, you would probably find that even a manipulative dealer is not going to bother changing prices to catch your bet – and let’s not forget that most spread betting providers are honest, and earn a decent income from the spread.
The great thing about putting a stop order on when you take out the bet (and you shouldn’t wait to do it) is that you set it while you are thinking rationally, and before you are starting to build emotions about the trade. While most traders agree stop orders are important when you’re trading shares, they are vital when you are spread betting because of the leverage.
There is one important point to make about the stop loss order. All the stop loss order does is to tell your dealer to sell your position. In the example above (see image), the trading platform of Capital Spreads automatically generated a stop order at 5777.0, which you could modify if you chose to. The way it works is that the price is monitored, and if it drops to 5777.0 then a market order is automatically generated to sell your position.
Can you see the potential problem with this system? As mentioned above, the price you get with a market order is not guaranteed. In this case, you might expect that you would get 5777.0, but in actual fact you could get 5773.5 or some other number less than that – it all depends how quickly the market is moving. In fact, sometimes prices jump overnight, so it might never trade at 5777.0, but drop directly to 5762. As soon as the market opened the stop loss order would be triggered, and your loss will be greater than you expected.
Now it does depend what you are trading in. Some prices are more volatile than others, and some just move gradually, so the risk is not great. If there is some news or a market glitch, this can sometimes kick prices to a new level. For this reason some people prefer to use the guaranteed stop loss order, which is explained in the next section.
Before leaving the stop order, it is just worth saying that you can also use a stop order to enter a trade. This isn’t done so often, but it depends on your trading plan. The effect of this is to take out a long bet if the price goes up, or to sell or take out a short bet if the price goes down. You may be wondering why you would want to buy a long bet at a higher price than the current one. After all, that lessens your chance of profit, which seems very strange. Why would you not take out the bet at the current level?
Well, in certain circumstances, you want to see which way the price is going before you place your bet. For instance, suppose the UK 100 seemed to be stuck around the 5890.0 level for a few weeks, but you suspected it was going to break out upwards, without knowing when that would happen. You could simply place a stop order to buy if the price went over 5900. While the price remains fluctuating in its current range, you would not be in the bet, but if it did break out upwards as you expected your bet would be on, all without watching the market.
Sometimes this use of the stock order is called a stop to open order or a momentum order. This is named after the type of trading that it supports – a momentum trader will look for the price to go clearly in one direction and then make the trade, trying to profit from the momentum continuing.