Should You Be Using Standard or Guaranteed Stop Losses to Manage Your Trading?

LONDON, October 27, 2011 /PRNewswire/ --

The financial markets have witnessed extreme volatility recently, creating significant price movement in everything from indices and equities to currencies and commodities. For a spread bettor, the potential to profit is high - but so is the potential to make sizeable losses. City Index (http://www.cityindex.co.uk/) offers standard stop losses and guaranteed stop losses to help traders manage the risks of spread betting in a volatile market.

Standard stop loss example

Imagine you decide to go long the UK 100 Index at 5540 at £1 per point. However, as you are unable to watch the markets all day, you will not be able to close your trade if the markets start going against you. You therefore decide to place a stop loss, which will close your trade at your desired price.

You set your standard stop loss order 25 points away at 5515. Unfortunately, the trade does not go the way you had anticipated and the market drops to 5500. As there was no gapping in the market, your stop loss order is executed at your desired price. As a result, the maximum loss you incur is £25.

It is important remember that standard stop losses are not infallible: the order will close each trade at the best available price once the stop value has been triggered. This means that, during times of market volatility, your trade could sometimes be closed out at a level that is different to your trigger value. One way to avoid this situation, known as market gapping, is by using a guaranteed stop loss.

Guaranteed stop loss example

For example purposes, imagine you bought £2 per point of the Wall Street Index at 10100, and highlighted 9950 as your maximum loss level, a £300 loss allowance (10100-9950 x £2). You can use a guaranteed stop loss order to ensure that should the Wall Street Index reach 9950, the trading platform will automatically close out your trade at this level, preventing you from incurring any further losses.

Unfortunately some bad company earnings pushed the Wall Street Index lower, straight to 9900 - but the trading platform automatically closes your position out at 9950. Even though the index continued to trade past your maximum risk allowance, the guaranteed stop loss had already stopped your losses by automatically closing out your trade.

Learn more about trading the financial markets with a free City Index seminar. Visit http://www.cityindex.co.uk/learn-to-trade/ for a list of forthcoming dates and topics.

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, spread betting.

We constantly look to improve the performance of our platforms and expand the range of services we provide. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer service and support. Visit http://www.cityindex.co.uk/ for more information.

SOURCE City Index

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