There are a number of tools available that you should make yourself familiar with that help you manage and control your risk.
Stops are used to close or enter positions after the price that has been specified by you is reached. Stops are mainly used as protection against allowing losses to run away in the event that the market moves against you and are a valuable risk management tool to utilise with your trading. They can also be used - as a trailing stop - to protect your profits as a position goes in your favour, more on this later.More
In addition, stop orders can be used to enter into a new position when the price moves to a predetermined level. Again, the entry level is specified by you and is either lower or higher than where the current market price is trading. Less
Using a STOP SELL order allows you to sell at a LOWER price level than where the market is currently trading. It will be triggered when the BID price touches or goes through the price you have specified.More
When that trigger level is reached and your order becomes active. It will be filled at the level you set it at if possible, or at the next available price if not.
If there is a difference between your specified STOP SELL price and the price it is filled at it is called “slippage”. This is driven by the underlying markets and is not an extra charge applied by us.
Example
You have a position in Vodafone long £x per point and the price is currently at 149p In order to protect your downside risk you decide to place a STOP SELL order in at 135p.
A few days later the stock is downgraded by several investment banks as they feel that Vodafone will miss its profit target for the year. As a result, the share price falls sharply and opens down at 129p from the previous day’s close of 142p. As this fall happened overnight, there was no possibility to trade at 142p and therefore the result is that your STOP SELL must be filled at 129p.
NB: If you had used a Guaranteed Stop Sell to protect this position you would not have suffered any slippage as we guarantee that you will sell AT your specified price i.e. 135p in this example. (See below for full explanation).
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Stop Buy Orders work in the same way as Stop Sell Orders except in reverse. In other words, you can use them to protect against losses or to enter a new position at a predetermined price trigger level. The only difference is that you are either putting an order in to buy to close out an existing short position at a price that is higher than the current market price; or you are putting an order in to buy to open a new position if the price moves up to the level you set as your Buy Stop price. More
As with sell stop orders, the price that you receive may in the end not be the actual price that you specified because of a price gap but it will of course be as close to that trigger as the market will allow.Less
Guaranteed Stops are not subject to ‘slippage’, even in volatile markets and therefore they make it possible for you to put an absolute limit on your potential losses. Guaranteed Stops work a bit like insurance. We guarantee that should a position go against you we will limit that loss to the amount you have stated, by way of ensuring that your stop is filled at the price you determined even if the price gaps suddenly.
Trailing Stops can be used on long or short trades, helping you to lock in your gains as the market moves in your favour. To set a trailing stop you need to determine firstly a stop level and secondly the number of trailing points.More
This type of Stop Order prevents you having to monitor and move your stops constantly. You set the conditions for your Stop to move automatically, should the market move in your favour.
Example
Vodafone is trading at 151p you buy £x per point but at the same time you want to put in trailing stop. The first thing you do is determine what stop level in which to start the trailing stop. You decide on 141p. The next thing you determine is the number of trailing points. You decide on 5 points.
What does all this mean? This means that your stop level at 141p will move up 5 points to 146p in the event of Vodafone’s share price increasing from 151p to 156p, ie 5 points.
In other words, from your specified stop level your stop sell will move automatically, up 5 points when and if Vodafone moves up 5 points.
To continue the example: now that Vodafone is trading at 156p your stop sell is in place at 146p; again, Vodafone moves up from this level by another 5 points to 161p and again, your sell stop order moves from 146p to 151p. This will continue ad infinitum as long as Vodafone continues to move up.
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In contrast to stop orders, which can only be filled at your price or worse, limit orders offer you the opportunity to trade at price you have specified OR BETTER. Like stop loss orders however, they can also be used to either exit an existing position or to create a new one.
Placing a limit order to buy enables you to buy at a price specified by you or LOWER. This could be to close out a short position at a profit or a loss; or, a buy limit order can also be used to enter into a new position. In both scenarios, the price level that you are trying to buy at must be lower than the current market price.More
Example Buy Limit (Exit Position):
You are running a short position in Vodafone which you entered into at 150p in for £10-per-point.
The current price of Vodafone is 155p – 156p. Even though your position is currently showing a loss, you still believe that Vodafone’s share price is going to decline to 145p. If it does, you would make a five point (£50) profit.
In order not to miss the opportunity to exit the trade at a profit you would set a Limit Buy order to buy £10 per point at 145p.
A few hours later, Vodafone starts to slide on news that customers are migrating to a competing mobile network provider. The price of Vodafone now trades at 144p – 145p at which point your buy limit at 145p is filled, realising 5 point (£10) profit.
Example Buy Limit (New Position):
You like the look of Vodafone, but the price is currently a bit high (150p) for you to enter straight away. Studying the chart, you consider that perhaps the price will decline slightly before it becomes a more attractive purchase, say at 140p.
You don’t want to watch Vodafone constantly throughout the day and at the same time you don’t want to miss the opportunity to buy Vodafone if it does trade down to 140p.
The solution in this case is to set place a Limit order to buy at 140p for £10-per-point. In due course, the price of Vodafone moves down to 140p and your Buy Limit is filled.
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A Limit Sell order works in exactly the same way as a Limit Buy - except in reverse. Placing a Limit Sell order allows you to sell a particular market at a price specified by you or HIGHER. Again, this could be to close out an existing long position at a profit or loss or indeed to open a new short position when the market you are interested in moves up to a higher level.