Financial Spread Betting – Trailing Stop Losses
In the last article we discovered how the use of ‘stop-losses’ was fundamental to minimising any potential loss, and – golden rule – how we should always automatically set a stop loss trigger for each and every financial spread betting trade we undertake.
In this article we learn how this tool can also help maximise our gain too. Sounds strange that something called a ‘stop-loss’ bet to do with maximising profits too, but read on to find out more.
One of the main benefits of spread betting is that we can cut our losses and ride our gains. As a result, one of the main questions asked is ‘when should I take a gain’, ie what is the right time to exit a successful spread bet? I deal with exit strategies in other articles I have written, but one of the key techniques employed is a self regulating exit tool called a ‘trailing stop loss’.
Imagine you ‘buy’ a bet on a share that you think will rise. Let’s say that it is now moving in the right direction. Remembering our earlier golden rule, we will have already put a stop loss on this trade at the time we took out the bet. And we will have set it at a price below the strike price that matched our risk appetite? Well now we imagine that our bet is newly struck, and move the stop loss up to a similar margin below the new current strike price. And as the price continues to rise, we continue to ‘trail’ it with the stop loss, ever increasing.
The vital point here is that we never, ever, put the stop loss back down again. This is a one way move designed to stop us losing out from a reversal of the trend, and it effectively locks in ever increasing amounts of our profits as we go along.
Clearly, this technique either requires you to have the time to follow the price and move the stop loss up in real time, or you need to find a financial spread betting firm that has a tool to allow you to set automated trailing stop losses.
And remember one final point. A ‘stop loss’ only triggers a sale order at the time the price is met. It doesn’t guarantee a buy or sell at that price. You could still lose out to market slippage. The only way to avoid this is to use ‘guaranteed stop losses’ that only some companies provide, and naturally are a little more expensive.
Good luck with your financial spread betting!
S Simon Smith writes extensively on Financial Spread Betting and recommends http://www.financialspreadbetting.co.uk for all Financial Spread Betting traders.