I am continuing on my feature about stop losses as I think they are vitally important when it comes to financial spread betting.
I hope by now that you have come to the conclusion that you need a stop loss as part of your financial spread betting system.
So where do you place your stop loss on each trade? There are many different places to put them and I will go through a few now. What you need to do is select one or more that suits your trading style.
The length of time you expect to be in a trade will be a determining factor as well as your personality. How do you react to a losing trade? If you are like me then not well but as you see this more of a system then you don’t take it personally.
When thinking about your stop loss position you have to place them far enough away that they won’t be affected by market ‘noise’ but also not too far away so that your losses aren’t too big.
Know you ATR…
There is a lot of random movement in financial markets called noise. You don’t want to set your stop loss within a range that will get stopped out too early.
A way to overcome this is to calculate the Average True Range (ATR). The ATR averages out the highs and the lows over a time period. The more volatile the asset, the higher the ATR will be.
You need to set the time period and you need to set that in context of the anticipated time in the trade. If you plan to be in the trade for a couple of weeks then you need your ATR to go back further than you would if you only plan to be in the trade for a day.
Where is the support/resistance?
A popular way to determine you stop loss position in financial spread betting is at support and resistance levels. For those who don’t understand the theory behind support and resistance there will be an upcoming post on it.
Once a support/resistance level has been found you need to set your stop loss just outside this i.e. once level has been broken.
Be warned that because this is a popular way of determining stop loss levels that the price can move very very quickly. Even if you have automatic stops in place the price might move so quick that you miss them.
To try and mitigate you can place your stop on unusual numbers and avoid rounded numbers that other financial spread betting traders will use.
Outside your M.A…
A popular financial spread betting system is the use of moving averages (M.A) to initiate trades. If you are entering your trade based upon a M.A. then it makes sense that the exit should be on the same principle.
The problem with M.A. is that they are always moving. So do you move your stop loss? Well that depends and I will cover that later in this post.
Cash exposure…
This will only really come about if the size of your bet is the same for each bet that you make. I don’t set up my trades in this way but some people do. Say you bet £10 per point on each trade, if you want to restrict your potential losses to £100 then your stop loss should be ten points away.
Your time has expired…
Now I’m not impatient. In fact I would day that patience is one of my qualities. Having said that though if the trade isn’t going anywhere for a certain period of time you have to hold your hands up and move onto the next trade.
Now this can be extremely frustrating especially if you see the trade move in your favour once you have exited but you need to consider that money is tied up in the trade and can’t be used elsewhere.
I don’t now of any financial spread betting accounts where you can exit automatically after a certain time period so this would have to be a manual stop loss. Select a period and if it hasn’t really moved after that point then exit the trade.
Moving your stop loss
Should you? Well you should only ever move your stop loss to reduce your exposure. If your trade goes the wrong way, don’t move the stop loss to increase you exposure. The trade was wrong, it is not your fault but you have to exit with dignity.
Just because your trade had exited it doesn’t mean that you can never re-enter. If the conditions become right again then by all means jump back on.
What if the trade goes in your favour?
By all means move the stop loss to reduce exposure. As with anything in financial spread betting, there are always trade offs. Moving your stop loss to reduce exposure increases the likelihood of being stopped out by noise.
How should you move your stop loss?
As we saw when setting the stop loss, there are a number of different ways to move it. For simplicity I like to go with a similar method to how the stop loss was initially set.
So…
ATR – If you initially set your stop loss at 2 ATRs, then recalculate how far this is away from the current price and adjust your stop loss accordingly.
Support and resistance – Has any new support and resistance levels developed? You may be struggling to adjust stop losses in this way so look out for another on the list.
M.A. – These are bound to change. What are they now showing you?
Cash exposure – Continuing the example above… the price moves in your favour by 10 points. You now move your stop loss by 10, so in this example, to you entry point.
It is important to understand the different ways of incorporating stop losses into your financial spread betting system. Yes they are flexible but sometimes you want them to be rigid to keep you under control.
Remember that although it can be extremely frustrating if you get stopped out, you can always re-enter the trade at a later date. Never…never move the stop loss to increase your current exposure.
Also, before I end this post about stop losses, if it important to know which prices your financial spread betting firm are using. Are they using own spreads, market mid prices etc. This is extremely crucial when placing stop losses around support and resistance levels.