What is the difference between a normal stop loss and a guaranteed stop loss order?

Spread betting providers offer some minimisation strategies to mitigate losses. Replicating the stock markets, you can place stop loss orders on your spreadbets, which will stop you out if your bet goes too far in the wrong direction.

OK, but what is a stop loss?

A stop loss is simply a way of capping the amount you can lose on any single spreadbet. You may for instance decide that you are willing to put at risk no more than £100 on a particular trade. If you place a trade at £10 a point, you would set your stop such that it would automatically close the spreadbet at the level where you would have lost 10 points, or £100 (£10 x 10 points).

A standard (normal) stop loss order is offered free of charge from all spread betting companies. It is available on all markets and once triggered will close out your position at the best price available in the market. If the market gaps, this may mean that your trade would be closed out at a price which is different to that of your stop loss level.

One advantage spread traders have over regular stock stop losses is that stops with spread betting can be ‘guaranteed’. If you are trading a real stock, there is always the risk that the price may whiz past your stop level without ever actually pausing at it – so you won’t be stopped at exactly the price level you want but at ‘best execution’. But a bet is simply a bet, and any stop loss conditions can be more easily priced into it.

A guaranteed stop loss order guarantees to close out your trade at the price level specified, irrespective of whether the market gaps. So, guaranteed stop loss orders provide the best protection however do note that for guaranteed stop orders there is an extra premium. Not all spread betting providers offer guaranteed stop loss orders and they are not available on all markets.

So for instance if you had bought £5 per point of the Dow Jones Index at 10150, and specified 9980 as your maximum stop loss exit level, you could use a guaranteed stop loss order at 9980. This way, should the Dow Jones fall sharply down to 9960, your trade would still be closed out at 9980.

With a guaranteed stop loss you pay a small charge to guarantee your order will be executed at the exact level that you set, regardless of market gapping. Guaranteed stops are especially useful in certain situations when there is a risk that the market you are trading could gap up or down overnight when the underlying markets are shut. For instance guaranteed stops can be useful when dealing with individual stocks and indices as you can face a gapping risk where stocks may decline sharply overnight while the stock market is closed and when they open they fall beyond your stop loss level. Guaranteed stops can also be useful when the markets are prone to violent swings as they work by automatically closing trades at pre-determined levels so in effect ensuring that spread trades are closed at the price you want.

Of course the comfort zone and peace of mind that guaranteed stops allow comes at a price, and you will pay more for the transaction. Guaranteed stops come at a price, usually amounting to about 1% of the trade. You can buy guaranteed stops with IG Index for instance the spread on eur/usd is 2 points,with a guaranteed stop this costs 5 point spread. Also, spread betting providers are quite savvy with their own risk controls and won’t provide guaranteed stops for stocks with low capitalisation. In most cases I don’t bother to take guaranteed stops – its not really necessary unless you trying to trade news or particularly volatile markets like commodities. The other thing to keep in mind that stops crystallise losses so if the markets recover after your position has been closed, you would miss out on any gains. Having said traders have been increasingly make use of guaranteed stop loss orders given the extremely volatile market conditions.

PS: If you are using a spread betting firm which is what most will be doing these days, you can (and should) always use a guaranteed stop when trading volatility. It costs a bigger spread in the first place but you can then move it around at your heart’s content. I recently had a large position in solo oil long not short, took the guaranteed stop and then trailed it to the price as it moved up, when the duster was announced the stop kicked in and saved me a fortune.

PPS: You might find that IG won’t open a position for £1000pp on a limited risk (guaranteed stop) basis. You might have to open smaller positions and be required to set different stops for each one. That’s been my experience with limited risk anyway.