What are trailing stops?
Trailing stops are a risk management tool that allow you to manage your risk without restricting your potential profit. Trailing stops help you to secure your gains as the market moves in your favour, giving you added flexibility as they will automatically track your profitable positions so that you don't have to continuously monitor your position and move your stop manually. It has always been possible to move your stop order manually if the market has moved in your favour, but now you can set our system to do this automatically for you.
How do they work?
A trailing stop can be added when placing a trade by ticking the "Trailing" box on the trade ticket. You can also amend an existing stop order to be set to trailing from Order Book by clicking on the AMEND button. Once you have ticked the "Trailing" box you need to set the distance you want your trailing stop away. If the market then moves in your favour, the trailing stop will move in that direction at a set size of increments. For details of the minimum distances and set size of increments applicable to trailing stops please see the Market Information Sheets. Please note that trailing stops are not guaranteed so you may still be subject to slippage in volatile market conditions, so it is not possible to have both a trailing stop and a guaranteed stop. There are no extra charges for selecting your stop order to be trailing. Trailing stops are not available on all markets so you should check the Market Information sheets to see if the trailing stop facility is available.
Example of a trailing stop
Here is an example of how one might use a trailing stop. Buy £10 per point of GBP/USD Rolling Daily at 1.6050. The level of the stop order is set at 1.6030 and the "Trailing" box is ticked. If the market moves in your favour (higher) then the trailing stop will move in that direction according to the set size of increments applicable to that market. If it is set to increments of 10 points (you can find this out from the Market Information Sheets), then if your GBP/USD Rolling Daily position moves higher by 10 points (to 1.6060), your trailing stop will jump up 10 points to 1.6040. If GBP/USD Rolling Daily continues to rally without retracing, then for every 10 points it rises, your trailing stop will carry on stepping higher in increments of 10 points. If at some point GBP/USD Rolling Daily does turn lower, then your trailing stop will remain in place at the last level it has stepped to, acting as a normal stop order.
A stop-loss order is your automatic get-out plan if a trade doesn't work out. It's an order that immediately closes your position when the price moves against you by a certain amount. By closing the position at a loss, you are (at least) saved from making even bigger losses. Whenever you open a position with Tradefair Spreads, our platform will automatically create a stop-loss order for you, based on how much you have in your account. You may amend this stop level at any time, but unless you specifically opt for your Stop to be guaranteed these stops are not guaranteed. So in the event of a market gapping you may not be filled at the level you requested which means you may lose more than your initial deposit. Click here for more details about Guaranteed Stop Orders.
To help protect you, the Tradefair Spreads platform places automatic stop-losses on every trade.
Let's say you're trading the value of an index such as the FTSE. The FTSE can (and does sometimes) move hundreds of points within the space of a couple of hours, meaning it can be 'volatile'.
You think the FTSE is going to go up so you click 'buy' at 4100 for £10 a point. The Tradefair Spreads platform will put automatic stop losses based on two things: the minimum margin requirement and how much trading resource you have.
You have exactly £300 in your account
In the case of the FTSE, the minimum margin is 30 and the maximum computer generated stop-loss is 150. This is the maximum in margin it will hold for a £1 position. So with the trade example above, the minimum margin required, which you must have in your Tradefair Spreads account is 30 x 10 = £300 and because you are 'buying' the FTSE, the stop-loss would be placed 24 points below your entry price
(80% of the margin - it's 80% to help prevent your account going into a negative balance).
You have £10,000 in your account and are placing the same trade
In this case, the Tradefair Spreads platform will take the maximum amount of margin required (150) and place the automatic stop-loss 120 points below your entry price (80% of the margin). If the market falls 120 points, your trade will be stopped automatically and on this occasion you would have lost £1,200. The stop loss was placed 120 points away because this is 80% of the maximum computer generated stop loss.
Please Note: If you have a Guaranteed Stop Order attached to an open position then the amount of margin taken will be the total capital you have at risk. For example, if you buy £1 per point of the UK 100 Rolling Daily and you have a Guaranteed Stop Order 50 points away, the system will use up only £50 of trading resources.
In trading, the markets occasionally experience something known as 'gapping' and this is one of the reasons why spread-betting companies - including Tradefair Spreads - have to say in the risk warning: 'you may lose more than your initial deposit.'
Here's how gapping could conceivably happen. Let's take a Vodafone trade as an example: you're trading along nicely having opened a 'buy' position when the price was at 110.2p, the current price is now 125.0p with the market about to close for the night. You decide to keep the trade overnight. Your stop-loss order is placed 10 points below at 100.2p. Overnight, something happens to cause Vodafone shares to reopen the next morning at just 80.2p. The price has gone through your stop-loss.
The stop-loss order would be executed when the market opened but you would still be liable for the difference between where your position was stopped out and where you had opened the trade, in this case 30 points.
If your stake was £1 per point, you would have lost £10 on your stop-loss plus an additional £20 due to the gapping. A £30 total loss.
Although our platform will automatically set a stop-loss for you, you can adjust it according to your circumstances and objectives.
Say you 'buy' Vodafone at 120p, with a stop-loss at 110p.
Vodafone shoots up to 135p, but you want to try for further gains.
So now, you could raise your stop-loss order nearer to today's price, to protect some of the profit you've made.
But - and this is a big but - moving your stop further away when things start going against you is usually not advisable. If you do that, you're deviating from your original plan. A better idea may be to get out of the position and cut your losses, then perhaps re-enter later on at a more favourable price.
Let's say you think the FTSE is going to rise (or rally) and you want to 'buy' it once it reaches a certain price.
Click the 'order' button and you'll be presented with the following dialogue box (shown below).
1. In this example, you think the FTSE is going to rise so you leave this button on 'buy'.
2. Decide on your stake (it defaults to £1 but you can bet as much per point as your funds will allow with a minimum of £1).
3. This is where you want your trade to start. When the market hits this value, your trade will be automatically executed (orders are not guaranteed)
4. Here, you can either enter a stop-loss level or enter a relative number of points (stops) away from your opening level at which you'd like to be stopped out. For example, 50 points (stops) below the level at which the 'buy' order is executed and your position will be closed if the market falls 50 points from your opening level.
5. Same goes for the limit - except in the opposite direction. Many experienced traders will have a strategy and will have decided in advance what return they will be happy with (based on how high they think the market will go before it starts to decline again).
6. Click the submit button to confirm your order.
Once you have completed those six steps your order will be in place. When it's executed, it'll appear in the lower window under the 'Open Positions' tab. You'll also receive an email confirming your action.
Remember, you must have sufficient funds in your account at opening, otherwise the trade will be rejected. Despite having orders attached to an open trade, you can still close your position at any time.
For example, you buy £1 at 4400 on FTSE and place a stop at 4350 so your maximum loss can be £50.
The FTSE rises to 4425 so you decide to close your position for a profit. You click on 'close' from the open positions page, this reveals the deal ticket, then you close by betting in the opposite direction. The position is then closed for a £25 profit and cancels the stop-loss.
The FTSE falls to 4380 and you decide it's just going to continue falling and you'll take the loss now. So, as above, you click on close to bring up the deal ticket and realise a loss of £20 and cancel the stop-loss.
You won't always be in front of your computer when the right opportunity to buy or sell arrives but if you place orders in advance, the job is done for you.
Orders automatically get you into the market, take profits for you, and are designed to help stop you from running up big losses.
Suppose the FTSE 100 is trading at 3851.5 and you think it would be a good buy at 3750.
You can place an order to trade automatically if the price hits that level.
Please remember orders are not guaranteed.
By setting an order, you won't miss out if the price briefly hits 3750 and then bounces while you're away from your computer.
Now that's stop-losses and orders covered, why not get a cup of tea before starting the next section.