How Stop Losses Can Help Protect Your Spread Betting Capital

Oct 12, 2011, 13:31 ET from City Index

LONDON, October 12, 2011 /PRNewswire/ --

Leverage is often seen as one of the most attractive features of financial spread betting, but it can also be one of the most dangerous - and means that spread betting can result in losses that exceed your initial deposit. Read this guide from City Index (http://www.cityindex.co.uk/) to learn about two different types of stop loss order and how they help to keep your spread betting losses to a minimum.

Standard Stop Losses

A stop loss is an order to close a spread betting position when the market reaches a predetermined level set by you, the spread bettor. The potential loss on a position is limited by requesting that the spread bet is closed once the price has fallen to an agreed level. Once a stop loss order is triggered your spread bet will be closed at the next available price.

For example, if you were to open a spread bet of £1 per point on the UK 100 at 5000 and were only willing to lose £200 on the trade, you would set up a stop loss order at 4800. This means that if the market price went against you and fell to 4800, the trading platform would automatically close your spread betting position at the next available price to prevent you from incurring any further losses.

Guaranteed Stop Losses

A guaranteed stop loss offers an additional level of certainty when managing your downside spread betting risk. With a guaranteed stop loss you pay a small additional premium on the trade to guarantee that the level at which your order will be executed is the exact level that you set, regardless of any market gapping.

For example, imagine you have bought £2 per point of the Wall Street Index at 10100, and have highlighted 9950 as your maximum loss level - a £300 loss allowance (10100-9950 x £2). You can use a guaranteed stop loss order to ensure that, should the Wall Street Index reach 9950, the trading platform will automatically close out your trade at that exact point.

Imagine some bad company earnings then pushed the Wall Street Index lower, straight to 9900. Your trading platform would still close your position out at 9950. Even though the index continued to trade past your maximum risk allowance, the guaranteed stop loss has already stopped your losses by automatically closing out your trade.

Ultimately, whether you opt for standard stop losses or pay the additional premium to apply guaranteed stop losses, the most important thing is that you always use one or the other to limit the downside risk of your financial spread bets.

Learn more about risk management in spread betting at:

http://www.cityindex.co.uk/spread-betting/how-to-manage-risk.aspx

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, spread betting.

We constantly look to improve the performance of our platforms and expand the range of services we provide. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer service and support. To open a free demo account with City Index, visit http://www.cityindex.co.uk/learn-to-trade/demo-account.aspx

SOURCE City Index