Advantages and disadvantages of a ‘normal’ stop loss

In spread betting, traders use stop losses to limit their losses however there is more than one type of stop loss. There are controlled or guaranteed stop losses and there is the normal stop loss. Each has its own advantages and disadvantages.

A normal stop loss has the advantage that it is free, however it is not accurate and you can sometimes lose more than you specified.

With a normal stop loss, the spread betting company will try to remove you from the trade at the price you stated but because the market moves quickly it may not be possible and when this happens it is called ‘slippage’.

For example, if you have opened a trade and said you want out at 4,000 you might be taken out at 3,994 instead, taking you out slightly early.

A good example is give below:

“You have opened a trade on the Dow index at £1 per point at 8,000. You decide you are happy to risk a maximum of £200, so you place a stop order at 7,800. In the next few days, the Dow moves down to 7,900 and at close of trading on the third day it is at 890. The next day some disappointing figures are released so as a result the Dow opens at just 7,700. As your stop loss has gone, the spread betting company closes your bet at the current market price. Your trade is closed at 7,690, which is 110 points below your stop loss. This means your loss is now £310 instead of the £200 you were originally willing to lose.”