Using a Stop Loss

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A ‘stop’ or ‘stop loss’ is an order normally placed to limit the loss on an open position. You can also use it to enter a market at an inferior rate, allowing you to enter the market on a break out of the current trading range.

ABC Corp is trading 134.25 / 134.75. You decide to go long £5 per point at 134.75.

  1. You want to place a stop loss so that your maximum loss if your position moves against you will be £100. Therefore you place a stop loss at 114.25 (£100 / £5 = 20 points below the sell price).
  2. If the price of ABC Corp moves below your stop loss of 114.25 then your position will automatically be closed out and you will make a loss of £100. If the price of ABC Corp rises then you can cancel your stop loss or move it to a different level free of charge. Please note that stop losses are not guaranteed. This means that if a price of an instrument falls significantly and never trades at the price your stop loss is specified at you will be taken out at the next available price. This is also known as 'gapping through'.
  3. For example, XYZ Ltd are trading at 656.25 / 657.25. You decide to go long at £3 per point and place a stop loss at 600. Overnight, the chairman of XYZ Ltd dies and at 8am the price opens on the stock exchange at 550.75 / 551.75. As the share price never trades at 600 you will be taken out at the first trade price which is 550.75 and you will lose £319.50.

Stop losses are free of charge to place but are not guaranteed. If you want to guarantee a position you must place a Controlled Risk Bet (CRB). s of £112.50 (plus or minus a financing). Trading with larger sizes increases your risk so make sure you understand the risks involved.

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