November 27, 2006

Financial Spread Betting: Stop Loss Orders

Protecting yourself with a stop loss order on your financial spread bet

When placing financial spread bets, it can be a good idea to place a stop loss order to help protect yourself from large losses. Incademy explains the idea behind a spread betting stop loss order:

Stop losses are used by active traders to make sure that their losses don't run out of control. The premise is straightforward:

At the time you place your bet, you instruct your indexation company to close out a bet if the spread reaches a certain level.
If you placed a buy bet, and the spread falls to your stop loss level, the indexation company will automatically input a sell bet.
If you placed a sell bet, and the spread rises to your stop loss level, the indexation company will automatically input a buy bet.

The effect either way will be to crystallise your losses at the time of the second bet. Any further losses on your first bet will be neutralised by the mirroring second bet. Usually stops are put in at the time you place a bet but they can be put in subsequently, and they can also be changed or cancelled half way through a bet.

It is important to realise, however, that because of the fast pace of financial spread betting, a stop loss order may not take effect as fast as you would like. However, even in such cases where you lose more than you thought, a stop loss order can still help you limit spread betting losses.