Minimise risk using spread betting stop loss tactics

A stop loss is one of the most important tools in a spread bettor’s toolbox. Using stop losses allows you to limit potential losses on spread bets while trading volatile markets. Without a stop loss, one price movement against your position could wipe out your entire trading account. 

Learn what a stop loss is and why understanding stop losses is crucial for success in spread betting.

Understanding a stop-loss order

A stop-loss is a conditional order you place with your spread betting provider to automatically close out a losing trade or position once the market price reaches a specified level. This preset level is referred to as the stop loss price or trigger price.

The primary purpose of a stop loss is to limit potential losses on a spread bet trade by closing out the position before further losses accumulate. It acts as a form of risk management and downside protection when spread betting on volatile financial markets.

How stop-losses function in spread betting

When placing a new spread bet trade, you can simultaneously set a stop loss order at your preferred trigger level. This stop price should be placed at a calculated distance away from the current market price, providing room for normal market fluctuations.

As a spread bettor, you have full control in choosing exactly where to place your stop loss below or above the current market. Common placements would be just below recent swing lows or support levels on the charts where you expect the market to stabilise or reverse.

For example, suppose you want to place a long-spread bet on Gold futures with the market currently trading at $1,750 per ounce. You could enter your long bet simultaneously while setting a stop loss order at $1,740 per ounce.

Should the market price for Gold futures fall from your entry at $1,750 down to your defined stop loss at $1,740, your open long spread bet would automatically be closed out by your provider.

Without a stop loss in this example, your long bet would remain open as Gold futures plummeted below your entry price, leading to more significant losses. The automatic closure enforced by the stop loss limits your downside.

The two critical variables for utilising stop losses effectively are choosing the optimal stop-loss price trigger level and setting an appropriate distance from the current market price. Markets will always fluctuate normally, so you don’t want to set your stop loss too close and risk getting stopped out prematurely.
 

You might also like to read: How To Trade Or Invest In Gold

Why stop-losses are essential in spread betting?

There are several advantages to employing spread betting stop loss orders as part of your risk management framework:

Locks in profits

Trailing stop losses allows traders to lock in open profits after a market has moved in their favour. For example, if a trader buys GBP/USD at 1.3000 and it rises to 1.3200, the trader is now up 200 pips.

To lock in this open profit, a trailing stop can be set at breakeven or just below the current market price (e.g. 1.3150). As the market rises, the stop is trailed higher to secure more profit while giving the trend room to continue.

If the market eventually reverses, the spread betting stop loss order triggers a close of the trade at the highest possible point, allowing the trader to keep the locked-in gains. 

Determines appropriate position size

Traders can calculate the maximum risk per trade based on their stop loss and the resulting stop distance. This then helps determine the appropriate position size.

For example, if a trader risking 2% of capital per trade sets a 50 percentage-in-point stop in GBPUSD, they can calculate a loss of 50 pips = $500 (based on one standard lot = $10 per pip).

So, for a $25,000 account, 2% risk means a maximum loss of $500 on the trade. Using the stop distance and risk %, the trader can correctly size positions relative to account size.

Vital for risk management

Stop losses are mandatory for highly leveraged trading instruments like spread betting to limit downside risk. Without stops, any losing trade has unlimited risk as markets can gap or swing aggressively. This is especially dangerous in volatile markets like commodities or currencies, where prices can spike rapidly. A spread bet without a stop could expose the entire account to a market reversal.

Stops enforce risk discipline, allowing leverage to be used safely. No trader can avoid losses, but by capping risk on every trade, stops enable traders to survive periodic losses and protect capital over the long run.

Managing risk with stop loss gives you staying power in the game - the ability to survive inevitable losing trades while still growing your spread betting account over time.

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8 tips for setting stop losses

Placing a spread betting stop loss effectively requires balancing multiple considerations. Here are some strategies and tips to perfectly manage your stop orders:

1. Place initial stops below logical support levels or zones. This provides enough buffer for normal market fluctuations before being triggered prematurely.
2. Adjust your stop distance based on your personal risk tolerance and account size. Traders with larger accounts can withstand wider stop distances and volatility.
3. As a trade moves in your favour, look to trail stops higher/lower to lock in open profits. Trailing stop techniques allow you to ride a winning trend while protecting gains.
4. In high volatility conditions, consider using wider stop distances to account for increased price swings and to avoid premature stop-outs.
5. Re-evaluate your stops as overall market conditions evolve. What is sufficient range during low volatility may be insufficient when volatility expands.
6. Use moderately wider stops for long-term positional trades and tighter stops for intraday setups.
7. Remember to actively adjust your stops up/down at critical technical levels. Failing to move stops is a common error among traders.
8. Consider using different stop-loss strategies for different trading styles. Trend following thrives on wider trailing stops, while range trading requires tighter stops.

The goal is to balance, allowing your spread bets to fluctuate while firmly cutting losses short at reasonable levels. Stop loss discipline is one of the pillars of trading longevity and success.

Common stop-loss mistakes

While stop losses are indispensable in spread betting, there are some common mistakes traders make. You must understand these errors to avoid repeating them in spread betting.

• Setting stops too close to the current market price leads to premature stop-outs before the market reverses.
• Failure to actively adjust stops as the market moves leads to giving back gains after a stop is hit. Remember to trail stops.
• Removing or widening stops after a trade goes against you violates risk rules and often leads to more significant losses.
• Setting arbitrary stops without considering technical levels or volatility conditions makes you prone to being stopped out randomly.
• Assuming stops guarantees avoiding a loss. Markets can gap through stops, so the best practice is to use them for probability, not certainty.

Avoiding these errors takes practice, but it is necessary for effectively using stops to preserve your spread betting account. Being honest about any habitual mistakes you make while betting is important. Changing your strategies can improve your spread betting habits.
 

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Examples of setting a spread betting stop loss 

Going long - If going long GBP/USD at 1.3500, an initial stop could be placed at 1.3450, allowing room for 50 pips of downward movement before closing the trade. If the market rallies higher, the trader would trail the stop higher to lock in gains, perhaps at breakeven or just below the market.

Going short - When going short oil futures at $105 per barrel, a trader might place the initial stop loss at $107 to allow a buffer for some upside price action. As the market drops, trailing stops would secure profits while giving the downtrend room to continue.

Range trading - Tighter stops are often used for range-bound markets like indices since breakouts are less likely. For example, if the FTSE oscillates between 7200 and 7300, stops could be placed 10-20 points away, allowing the market to cycle between range extremes.

Volatility expansion - If volatility substantially increases at major news events, stop distances must be widened to prevent being stopped out prematurely. Constantly adjust stops based on changing volatility conditions.

In a nutshell,

Mastering strategic stops provides leverage to maximise winning bets while minimising losses on inevitable failed trades. Always use a stop-loss positioning on every spread bet trade to protect your capital and enforce disciplined trading habits for long-term success. 

With the proper integration of stop losses, spread betting transitions from reckless speculation to a controllable trading method with favourable risk-reward ratios. 

Start practising stop-loss order execution at markets.com

We encourage all new spread bettors to use a risk-free demo account to practise implementing stop-loss orders before trading with real capital. Our demo provides a realistic spread betting environment to acquire experience with stop-loss mechanics.

Place a series of demo trades while experimenting with stop-loss placement and order types. This hands-on practice will prepare you to apply stops effectively when live trading. While demo trading, don’t hesitate to reach out to our 24/5 customer support team if you need any assistance.

Our team is always available to answer questions promptly and walk you through any aspect of the platform or order execution. We want to ensure you feel confident using stop losses to manage risk before committing your capital.

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“When considering “CFDs and Spread Betting” for trading and price predictions, remember that trading CFDs and Spread Betting involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”