When trading on the stock market, you often come across instances where you issue a buy or sell order at a specific price, but when this order is executed, or ‘filled’, the price you actually receive may be slightly higher or lower. This is known as Slippage.
But is slippage that much of a problem, or is it part of the whole trading process that no trader in any market can eliminate completely? Most Spread Bet brokers now offer their clients a way to eliminate slippage once and for all, in the form of a guaranteed stop loss or, as some Spread Betting companies call it, a controlled risk spread bet. How Does a Guaranteed Stop Loss Work?
If you decide to ‘bet’ £5 a point on the FTSE 100 on close at 4250, and place a normal sell stop loss to dump the position at 4200 and the next day there is a sudden implosion of profits which hits the opening of the London stock exchange in the morning, dropping the FTSE 100 down to 4000, you’d be looking at a huge loss in the area of 250points at £5 a point. This would be because you sell stop loss at 4200 is filled on the opening of business at around 4000, so earning you the 250 points of negative slippage.
But if you had used a guaranteed stop loss at 4,200 then even if the FTSE had opened down 500 points, your stop would have been elected at 4200 and not a point lower. This is a guaranteed stop or a controlled risk spread bet in action.
Clearly, in certain circumstances, a guaranteed stop loss is a massive advantage over a traditional one. But they are not free; your spread bet broker will charge you for using them.
The amount that the client is charged varies from spread bet broker to spread bet broker and from product to product, but in the FTSE 100 the cost is usually 3 points added to the spread. Also if you want to use a guaranteed stop loss then you have to inform your broker as he quotes you his initial price so he can add the cost to the two-way quote.
If you wanted to go long the FTSE and place a guaranteed stop loss then, instead of making the market 4200-4204, the spread bet broker would add 3 points either side to make the FTSE 100 quote of 4197-4207.
Use guaranteed stops if you must, but realise that they cost money and keeping trading costs down should be an imperative goal of all traders in the spread betting arena.