Wednesday Dec 6 2023 03:19
4 min
A guaranteed stop order is a type of stop-loss tool, which guarantees to close your trade when it hits a price you specify in advance.
Essentially, it functions as a risk management tool, allowing you to cut any losing trades at a specified price.
When you use a stop loss, you request that your trade be closed at a specified price, and your broker will attempt to meet that request.
So, if you were trading a CFD share valued at 7,160, you might choose to set your stop loss at 7,100.
This means that if the share price hits 7,100, your trading platform will then close the trade at the earliest possible opportunity.
However, with a normal stop loss, you can run the risk of slippage.
See, there is a gap between when you place the order to close the trade, and when the trade is actually executed.
In between these two points, the price can still move. This movement is called slippage.
So, say you set your stop loss at 7,100. Your trading platform will automatically place the order to close the trade when the price hits 7,100, but by the time that close is executed, the price has fallen further to 7,080.
Your loss is based on the price when the trade is executed, so you’ve lost more money on this trade after the stop loss has kicked in.
When you use a guaranteed stop order, you pay your broker an additional fee, and in return, they guarantee that your trade will close at the price you specify.
Essentially, the broker guarantees to take on any additional losses that occur due to slippage.
The premium cost on a guaranteed stop order will usually depend on the current market price of the asset in your chosen trading currency.
It depends on your goals.
The main benefit of a guaranteed stop is, of course, that you know in advance what your maximum loss will be.
This can enable you to manage your risk more effectively, especially across a broad portfolio.
Some traders prefer not to use stop losses or stop orders because they believe in the long-term profit potential of their trade enough to think that even if the stock does fall in price, it will gain those losses back.
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As always, you should research any trading tool in depth before you choose to use it and never trade with money you cannot afford to lose.
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