Introduction

On previous pages you have seen how stop loss orders work, and the concept of slippage when utilising them was explained.

But is slippage that much of a problem, or is it part of the whole trading process that no trader in any market can eliminate completely? Whatever your view, the Spread Bet brokers now offer their clients a way to eliminate slippage once and for all, in the form of a guaranteed stop loss or, as some Spread Betting companies call it, a controlled risk spread bet.

How Does a Guaranteed Stop Loss Work?

Say you go long £5 of March FTSE 100 on the close at 4250 and place a normal sell stop loss to dump the position at 4200. You are planning to hold the spread trade for a few days. But after Wall Street closes IBM announces a sudden unexpected implosion of profits which is likely to dramatically affect the opening of London the next morning.

The FTSE 100 opens down 150 points in sympathy at 4100, and your sell stop loss at 4200 is filled on the opening at around 4100 so earning an unwelcome 100 points of negative slippage.

But if you had used a guaranteed stop loss at 4,200 then even if the FTSE had opened down 500 points, your stop would have been elected at 4200 and not a point lower. This is a guaranteed stop or a controlled risk spread bet in action.

Guaranteed Stop Losses Cost Money

Clearly in certain circumstances a guaranteed stop loss is a massive advantage over a traditional one. But they are not free, your spread bet broker will charge you for using them.

The amount that the client is charged varies from spread bet broker to spread bet broker and from product to product, but in the FTSE 100 the cost is usually 3 points added to the spread. Also if you want to use a guaranteed stop loss then you have to inform your broker as he quotes you his initial price so he can add the cost to the two-way quote.

If you wanted to go long the FTSE and place a guaranteed stop loss then, instead of making the market 4200-4204, the spread bet broker would add 3 points either side to make the FTSE 100 quote of 4197-4207.