Advantages and disadvantages of guaranteed stop losses

In financial spread betting, stop losses are invaluable tools to help ensure that you limit your loss to an acceptable amount for what you are willing to risk.

In an earlier article, we talked about the advantages and disadvantages of normal stop losses, which are free but inaccurate. Here we will discuss the other type of stop loss order called either a Controlled Risk or a Guaranteed stop loss, and the advantages and disadvantages of these.

The advantage of this sort of stop loss order is that you ensure you are taken out of your trade at the exact price that you specific so you know exactly how much you can lose as a maximum. A guaranteed stop loss is a sort of insurance.

The disadvantage is that you have to pay a little extra for this sort of stop loss order.  

As an example, if you are trading on the Dow Jones index, even if the market goes 1000 points beyond the point of your stop, you will still only lose what you specified as an acceptable loss.

The price for a guaranteed or controlled risk stop loss is approximately four times the stake and the amount is either added to the spread or taken from your account balance.  

Despite the disadvantage of having to pay for these, they can save a lot of money and if you have only a small capital then they are well worth the money.