Page 1 : Page 2 : Page 3 : Page 4 : Page 5 : Page 6 : Page 7 : Page 8
What Is a Stop Loss?
A stop loss is what it says: an order to stop your losses. And in taking a loss you are preventing any further loss.
- You can also use stop losses to protect built up profits
- For example, you bought the FTSE 100 index at 4100 on Monday and by Thursday its trading at 4250
- You could elect to place a stop loss at 4200 to protect your profit
- Although the order is not an actual stop loss because if the market moves down through 4200 the trade will be a profitable one, it's still referred to as a stop loss order
- This is why many traders actually call stop loss orders, just stops
Stop losses are used just the same for short trades but obviously in reverse. A trader who uses spread bets to sell short the Dow Jones index at 9200 may decide to place a stop at 9250. This would be referred to as a buy stop.
How Stop Loss Orders Work With Spread Bets
A stop loss order has many of the same characteristics of a simple market order but is 'held back' from actually being activated until the market price trades at the stop loss level.
If you have bought Vodafone at £5 a point at £1.20 and want to place a stop loss to sell at £1.15 then the broker would do nothing with the order until the price of Vodafone traded down to £1.15 level.
The moment Vodafone starts trading at the stop loss level (£1.15) the broker would activate the order and sell your position. However, if the market in Vodafone shares or the overall stockmarket is very volatile you may well actually sell lower than your stop loss level of £1.15. This potential difference is referred to as slippage, and it is a characteristic of all markets whether spread bets, futures, CFDs, cash stocks, foreign exchange and so on.
