In the world of financial spread betting, there is some serious cash to be made if we strike at the right time and ride the wave until a violent market movement settles down.
Fortunes have been made in minutes using spread betting to capitalize on financial market movements, with professional bettors making millions in just days because they’ve made a great call.
Yet fortunes have also been lost in days when they’ve called it wrong. Financial markets can move both ways, and just as when we place a bet and they move in the direction we want we can collect profits for days on end, so too can the losses stack up quickly if we call it incorrectly.
Enter the STOP LOSS. It is this simple risk management tool which allows bettors to limit the losses they are willing to take and minimize the damage in the event of a financial bet going wrong.
What is a Stop Loss & How Does it Work?
When you place a spread bet on a stock price or financial index, you are betting that the price will either rise (long) or that the price will fall (short). Once you nominate a price per point, for example $1, for every point (or penny) the price moves in your direction, you will gain $1. For every point (or penny) it goes in the opposite direction, you will lose $1. It’s really as simple as that.
For example, if Ford stocks are worth $84.90 and you bet short on it to the value of $1, for every penny Ford stocks fall below that price, you will gain $1. For every penny the rise above $84.90, you will lose $1.
But how do we stop the losses from getting out of control when we bet incorrectly? Stock prices and markets can move hundreds of points in seconds at certain times, and while this allows us to make fast profits, it can also lead to fast losses if we don’t minimize our risk.
A stop loss is a tool which allows us to set a limit on how much we are willing to lose. Here’s an example to illustrate:
Gerry bets $1 per point that the FTSE100 is going to rise. He’s sure the Bank of England are going to announce an increase in the supply of Pounds Sterling, and he knows from previous experience that this gets investors giddy and they tend to buy more stocks, causing the FTSE100 to balloon. The FTSE100 is trading at 7900 points, and Gerry thinks it might rise to 8100, giving him a $200 profit if he is right.
However, just in case he is wrong, Gerry places a stop loss at 7800. That means if he is wrong and the FTSE100 drops rather than rises, the most he can lose is $100 after the trade goes 100 points in the wrong direction. He has placed his bet at 7900, and placed a stop limit at 7800, meaning when the market drops to 7800, his trade will automatically close out.
Gerry is a smart spread bettor who has made a very sound decision. He is risking $100 maximum for the potential gain of $200 or even more. If he’s done his homework and has an actual logical reason for believing the Bank of England will increase the money supply, instead of just guessing, the odds are very heavily in his favour and he stands to make a quick bundle of cash.
So, a stop loss limits the damage that can be done in the event that a financial bet is incorrect. It’s a computerized mechanism that automatically executes a CLOSE TRADE command once a certain loss limit has been reached.
Stop losses work even if you aren’t present and are off doing something else. That means you can place your bets and sleep easy, knowing that you’ve pre-determined the amount you are willing to lose.
Do Stop Losses Ever Fail?
In times of extreme market turmoil, such as a financial meltdown or crash, it has happened that stop losses have failed since the amount of SELL/SHORT trades far overwhelm the amount of BUY/LONG trades to absorb them.
This is a risk bettors will have to be willing to take if they want to capitalize on such situations. Remember that there is no obligation to bet at any time, and if the market is in a frenzy, the safest bet may be to sit it out and wait for things to calm down.
However, there is also something called a GUARANTEED STOP LOSS, which will cost up to 1% of the trade, which acts as an insurance policy and will mean the STOP LOSS mechanism can not fail, and any losses exceeding your pre-determined amount will be covered.
If you are going to bet on the financial markets at times when the world is going into a tailspin in an attempt to make huge profits like some legendary traders have done in the past, it may be best to cover yourself with an extra layer of protection, since the financial markets can be an unpredictable war-zone during such times and even the very best bettors with years of experience can get caught off guard.
Some bettors prefer to use the GUARATEED STOP LOSS on every trade. It really depends on your appetite for risk and how safe you want to play it. That’s an option if you want to play it on the safe side.
How Can I Place a Stop Loss?
Every time you place a bet, there should be a prompt asking you if you want to place a STOP LOSS. This may come in the form of a popup box, or you can ‘tick’ the option and enter the designated point at which you want the bet to close out.
If you have any doubts, talk to the customer service team or your account manager at your chosen spread betting platform and have them show you exactly how to place a STOP LOSS on their platform.
Stop Loss Summary
A STOP LOSS is an essential risk management tool for spread bettors hoping to win big on the financial markets.
Since the nature of spread betting is that losses can keep on rolling even after your initial deposit has been gobbled up, anyone who places a spread bet without a STOP LOSS is a foolish bettor indeed. If you are the kind of person who would consider doing this, in all honesty, spread betting probably is not for you.
That said, if you correctly use the STOP LOSS and manage your risk, there’s nothing to fear in spread betting and you may just be the next trader to make a fortune overnight! Imagine a trade where you bet $100 per point and the market moved in your direction 1000 points in 2-3 days, and you get an idea of just how profitable spread betting can be. This is far from fantasy, and much bigger bets have been made and won over the years.
We hope this has been a useful guide to stop losses, and we wish you the very best of luck!