Guaranteed Stop Losses

• If you're unsure of what a Stop Loss is - See this guide

A guaranteed stop loss is similar to a traditional stop loss but whereas a normal stop might suffer from slippage, a guaranteed stop as its name suggests guarantees a certain exit price.

Slippage is the difference from where a stop loss level is placed and the where the actual order is filled. For example, if you enter a stop (not guaranteed) to sell £2 of the FTSE at 4300 the actual sell price might be 4297 and the 3 point difference is slippage. More information on slippage on the main Stop Loss page.

But is slippage that much of a problem, or is it just one of the negatives of trading which every trader, whether large or small, has to accept?

Whatever your view, the Spread Bet brokers offer their clients a way to eliminate slippage once and for all, in the form of what's called a guaranteed stop loss or, as some Spread Betting companies call it, a controlled risk spread bet.

• You're quoted the FTSE at 4230 - 4232
• But you're worried about slippage because the market is volatile and so decide to use a guaranteed stop loss
• However, when you deal, a premium is added to the quote so now the spread becomes 4226 - 4236
• The 4 points added and subtracted from the original quote of 4230 - 4232 is the insurance cost for the guaranteed stop loss

4 points on the FTSE doesn't sound like a large amount of money but do enough of these trades and unless you're a truly exceptional trader it's going to be extremely hard if not impossible to make money over time.

Stockmarket/Trading Providers
Spread Betting brokers CMC Markets TD Waterhouse Spread Betting E*TRADE Spread Betting	Online Brokers E*Trade Hargreaves Lansdown Stockbrokers TD Waterhouse	CFD brokers Saxo Bank Online Trading TD Waterhouse CFDs City Index

The insurance is paid upfront

You pay upfront for the cost of the guaranteed stop loss even if it's not needed. For example -

• You buy £5 of the FTSE at 4232 (+ 4 points of insurance) so your actual dealing price is 4236
• The market rallies 50 points and you sell out for a juicy profit
• So the insurance cost of 4 points wasn't needed and theoretically the money has been wasted (with hindsight of course)
• If you think about this, it's an incredible advantage to the spread betting firm and it's no wonder many of them try to push guaranteed stops so much

Guaranteed Stops are expensive

In the FTSE the cots if about 2-4 points and with shares anywhere from 0.3% - 0.75% of the size of the deal and believe me those costs, whereas they look relatively small, are a massive handicap to pay.

Don't believe anyone who tells you that guaranteed stop losses are not that much and are worth the cost. Either those people have an interest in selling them or they don't know what they're talking about.

As I have indicated many times on this site, the cost of doing business is an incredibly important factor to pulling profits out of the markets overtime, and it's not all about buying and selling at the right prices, although that helps! So ignore costs at your peril.

Professionals hardly ever use them

If there's one group of traders who know the important and dominant role that costs play when trading and investing it's the professional traders. So you won't find them using guaranteed stops and that speaks volumes.

The professionals will probably approach the markets like this -

• They realise that slippage is part of the trading game, but 95% of the time it won't be a problem, perhaps 1-2 points in the FTSE maximum
• But there will also be countless times where there's no slippage when stops are activated
• Yes, a few times a year slippage will be a problem but by not using guaranteed stops they will have saved a fortune and it's that money that will be used to pay for the excess slippage
• In effect they have self insured their stop losses and probably saved a fortune as well

They're designed for beginner traders

Never discount the power of scare marketing, we witness it all the time.

For example, the Vitamin industry regularly uses it - if you don't take your daily vitamins then there's a high chance you'll be in poor health and die early etc. OK, I'm elaborating somewhat but you get the point.

And scare marketing is probably used to push guaranteed stops as well focusing on the fact it's possible to lose more than you expected if some major news/event hits the markets. That may be true but it's not going to happen as much as perhaps they suggest.

Just because they're expensive and bad value doesn't mean we as responsible traders shouldn't use them. I for example would defiantly consider using them in certain situations, such as -

• If I were to trade an unusually large position - If my trading size in the FTSE is traditionally in the £2 - £7 a point range and I take a position of £30 a point or more that's a lot of risk should the market move quickly against me. So a guaranteed stop loss is worth considering
  
  
• When the markets are exceptionally volatile - Slippage is a way of life for the trader and it's no problem if relatively small. But slippage can be a major problem when the markets are exceptionally volatile, so again I would consider using a guaranteed stop

They're often heavily marketed to new traders whereas professionals hardly if ever use them, and that should tell you everything you need to know.

So don't be scared about slippage it's not really a problem unless the markets get super volatile. My advice - just use regular stop losses.

See also

• Stop loss - What are they - how they work
• Orders - What are the different ones - how they work
• FAQ section - Why 'capital preservation' is the most important aspect of Spread Betting
• FAQ section - Which is best - a normal Stop Loss or Guaranteed Stop Loss