Stop Management in Spread Betting

When people think about financial spread betting, they often focus first on 'stock picking', that is, which market to trade, and then second on determining an entry point. A distant third, if considered at all at the outset of the trade, is the exit point.

An exit strategy is a point of vital importance for successful financial spread betting, however, and an excellent way to implement the exit of a spread bet is through the use of a stop order. Placing a stop on an open position is all about exiting your position once the market is moving against you. If you have decided that a certain price movement would mean that you no longer wish to hold your position, a stop helps to enforce the discipline of keeping to that decision when the time comes and also executes your exit if you are not in a position to monitor the market.

Given that a stop governs your exit and that when you exit is at least as important as when you enter a trade, it is worth putting some careful thought into where to actually place such an order.

It is therefore worth avoiding placing a stop at arbitrary levels - a common mistake from my own personal observations of spread betting clients historically - such as placing a stop at a level that is a round number or setting the stop a round number of points away. One of our most popular market is the FTSE 100 index, and I often see stops being placed 50 or 100 points away or set at 4600 or 4650 and so forth. These stop levels are clearly not being calculated in any logical manner; instead they are the result of a more whimsical decision-making process and therefore unlikely to yield satisfactory results.

A way to make the stop-placement more rational is to look at historical price data and make some kind of quantitative judgment.

It is also a good idea to match the stop level to market conditions and to the objectives of your bet. You should also take into account your own psychology and what suits your temperament.

For example, if you are looking to profit from a certain market move, the last thing you want is to have your stop hit by market 'noise' - random price fluctuations - so that you make a loss even if you are correct about the general direction of the market.

It would be a good idea in such a case, therefore, to take into account the volatility of the market. A wider stop would match a generally more volatile market, whereas a tighter stop might be a more suitable option for quiet market conditions.

One measure of volatility that is often used by technical analysts is Average True range (ATR). The 'true range' of a market includes the previous day's closing price when determining the range (so that if the previous day's close lies outside the normal day's range it is used as either the high or low price). The ATR is then an N-day moving average of the true range values.

Using a tighter or wider stop strategy should also be a function of your overall trading approach. For example, you might use a tight stop if you are looking to trade over a short time frame when you think a major price change is likely. The benefit of a tight stop is, of course, that it means you are risking less money. At the same time, it also means that you are more likely to be stopped out for a given level of volatility and this is where you have to take into account your own trading style: if you can't stomach a lot of small losses, it follows that regular usage of tight stops is unlikely to suit your mindset.

Unfortunately there is no golden rule for precisely where is best to place a stop: however, there is a golden rule of trading that says that you should aim to have the average amount you make on your winning trades substantially exceed the average amount you lose on your losing trades. Placing a stop loss that quantifies your downside for each trade, therefore, provides you with a benchmark for how much profit you should be aiming for (for example, if you are consistently working with stops risking 70 points, you should not be grabbing 20-point profits).

Pure Deal is one trading platform and it offers a free trailing stop functionality: this automates the process of following the market and therefore saves you a lot of time and trouble. If the market moves in your favor, it is possible to set a stop that will move up with the market, an elegant way of attempting to lock-in profits.

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