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Spread betting explained – stop loss and GTC orders

There are only two rules with managing stops, whether you are spread betting, trading in the cash markets or speculating in futures, and these are as follows :

  • You NEVER move a stop loss down in a long trade
  • You NEVER move a stop loss up in a short trade

Back to our Tesco  example I’m afraid again. So we have opened our long spread trade at 321 and our stop loss order is set up at 291, and assume we have decided not to include a limit order with this trade. So what are the likely outcomes. First the spread bet goes against us, and we are stopped out. Secondly the bet expires in December and closes out our position ( either at a profit or loss), or finally we may decided to roll the contract over into March. Let’s take the last option and assume that by December the spread being quoted is 375 – 378 as before, but we feel that in the next few months, prices may move higher still, so we want to roll over the contract which is fine. Now what about our stop?

Well we entered the trade with a maximum loss of 30 points, but the spread is now at 375 – 378, so if we were to move our stop loss up, we can actually lock in some profit, or at least be in a position to have a riskless trade which is always the ultimate goal. We therefore cancel our existing stop loss order at 291, and open a new stop loss order at 345 at the same distance as before from the market. What has this achieved? Well in simple terms we have now “locked in” a guaranteed profit which is the difference between our entry lever of 321, and our new stop loss position at 345. In effect we have locked in, or guaranteed ourselves, a profit of 345-321 = 24 units, ( or £24 in this case) even if the market suddenly moved against us ( assuming the stop was guaranteed). Using this simple strategy often called a trailing stop, we have locked in a guaranteed profit, and are now trading risk free! You can ofcourse repeat this as many times as you like ( and you may decided to tighten it up a little to lock in more profit), moving your stop up in line with the spreads as they move. However, once moved up, remember the first rule above – YOU NEVER MOVE A STOP LOSS DOWN IN A LONG TRADE.

If you use the simple stop loss, this strategy will cost you nothing, and is the one I use myself all the time as it’s so simple. Why more people don’t trade using this risk management method I have no idea, but there we are! You can ofcourse use exactly the same strategy in short positions, but in this case the stop loss order is above the spread – again you simply move it down in “steps” to lock in your profit to provide a risk free position. Finally some companies do offer the trailing stop as an option, but you will have to pay for the order – personally I prefer to manage all my open positions myself as I don’t like computer generated decisions of any kind – that’s my job as the trader and no computer has a brain as far as I know!

Now finally, one other order that you need to be aware of with regard to the stop loss. GTC is a term you will come across in many forms of trading and spread betting, and simply means that this is an order which remains live, until it is cancelled by you ( so what I hear you say) – when you trade shares for example, and place a stop loss which is a GTC order, and then subsequently close you position in the shares, you must also remember to close your stop loss, otherwise it will be triggered if the market falls, resulting in an open order going short! Not what you intended at all. In spread betting the stop loss is associated with the order, and should therefore be removed from the system when you close out a position, but only when you place this at the same time as your opening order. If the stop order is attached to the open position, once the open position is closed the stop is automatically cancelled. If the order is independent and the open position is closed the order will remain until it is triggered, it expires or it is cancelled. So if you add it after, then it will not close automatically and it is therefore a GTC order. If the stop loss order is GTC, it is your responsibility to remember and cancel the order, not your financial spread betting companies, so you have been warned!!