Trailing Stop Losses - Explanation

• A trailing stop is where you move the stop level higher as the underlying stock or spread bet instrument moves higher
• If you were using a 25 point trailing stop loss on the FTSE 100 and you buy at 4200, the stop loss is 4175
• The index then moves up to 4250, and so you move the stop loss up to 4225
• The index then falls back to 4235 before powering ahead to 4300, and the 25 point trailing stop is now 4275 and so on

Breakeven Stop Losses

A breakeven stop is a stop loss order that is placed at the same level of the original price, although obviously the spread bet price will have to move higher before utilising this kind of order.

• For example, you buy £1 of the Dow Jones spread bet at 9100 which quickly rises to 9150
• Now could be a good time to place a breakeven stop at the level of entry 9,100
• In volatile markets such as we have been experiencing over recent years profits can both be made and lost quickly, so using a breakeven stop is often a good way of protecting built up profits in your account

However, you have to strike some sort of balance on how far the spread bet price moves before you can place a breakeven stop. If you buy BT shares at £2.50 then clearly moving your original stop up to breakeven if the share price rises just 3p is ridiculous. If we had done this trade looking say for a target price of £2.80 we'd look to use a breakeven stop if the shares went to £2.60-£2.65.

Tight Stop Losses versus Wide Stop Losses

A trader buys £1 of the FTSE 100 at 4200 and either looks to place his stop at 4190 (stop loss A) or at 4150 (stop loss B)

Which stop loss (A or B) carries more risk? Most people will instantly say stop B because it risks 50 points versus 10 points for stop A. Looking it on a pure monetary basis this is correct, but you also have to look at it on a probability basis as well.

• With a tight stop the FTSE 100 spread bet price could easily move down 10 points but not so easily by 50
• Hence there is a trade-off between having a tight stop with a high probability of being stopped out, and having a wide stop with a lower probability of the market moving to that level
• The true risk of a stop loss is therefore the number of points of risk alongside the probability of that level being hit
• This is why wide stops generally assume less risk on a trade than tight stops because a wider stop is less likely to be hit during everyday market moves
• Clearly though some balance has to be struck

This is critical information, because many investors when they first start using stops generally place them far too near the current price thinking that they'll lose less money when wrong. On any given spread bet trade they are correct, but over a series of trades placing your stop loss further away from the present price is normally the better option. If in doubt always use a wider stop loss especially in volatile shares or markets.

Placing Stop Loss Orders With Your Spread Bet Broker

This is very simple and can be done in either of two ways

1. When you phone to place the original order you can give the stop loss order at that time, or you can call and place it later
2. If you're trading online then you simply enter the order using your trading software