CFDs Made Simple by Jeff Cartridge Ashley Jessen

Author:Jeff Cartridge, Ashley Jessen
Language: eng
Format: epub
Published: 2018-07-25T16:00:00+00:00

Guaranteed stop loss orders

Guaranteed stop loss (GSL) orders allow you to place a stop a certain distance below the current price of the instrument you’re trading. GSLs are not readily available from all CFD brokers as there is quite a lot of potential risk involved in taking these orders. Generally speaking only market makers provide this type of protective order, as they’re guaranteeing you a price which may not be available in the real market.

By way of an example, let’s go through how a GSL order works. Let’s say you have a position on a share CFD at $5 and you heard a report was due out after the market close. When a share reports after hours it can sometimes mean the price will gap considerably the next day, leaving you potentially exposed to a significant loss. As a result you decide to place a GSL order at $4.75, which means that if the price should open at any point below $4.75 then your worst case exit would be $4.75. Even if the price opened at $3 the next morning, which would be highly unlikely, then you would be guaranteed to be closed out at $4.75. As you can see, the potential risk lies with the CFD broker,

hence the reason very few are willing to take this type of order.

Advantages of using a GSL order

Being protected against your worst case scenario (and the peace of mind associated with this protection) is by far the biggest advantage of using a GSL order. Anything allowing you to reduce your potential risk and worst-case scenario is a good thing for a trader, but let’s take a look at what the disadvantages are to add some perspective to the equation.

Disadvantages of using a GSL order

Increasing your brokerage is never a good thing but is it okay if it allows you to reduce your risk? Depending on which CFD broker you use, guaranteed stop losses can cost you as much as three to five times the normal brokerage rate. As a result you’ll need to run some numbers to see if it’s worth your while.

Tip

GSL orders require an upfront premium, which is debited from your account as soon as you place the order, irrespective of whether the order goes through.

Occasionally, as a result of the flexibility of using a GSL order, some traders increase their position size to levels well above what we would refer to as safe risk-management levels. This is not a sensible plan and we highly recommend you do not increase your position size as a result of the perceived protection a GSL order might give.

Probably the largest disadvantage of GSL orders is the restrictions on how close you can place your order to the current market price, with some brokers requiring a minimum distance of 5 per cent from the last traded price. Unfortunately on the Australian market you will find it extremely rare for shares to regularly gap 5 per cent from yesterday’s close to the next day’s open. As

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