Stop-Loss and Take-Profit Limit Orders
What is the importance of Stop-Loss and Take-Profit Limit orders in financial spread betting?
When you’re spread betting you may have noticed that there is a fair amount of risk involved. We have written up some examples in these articles that show big wins but also big losses. What if there was a way to mitigate these losses so you could keep your big wins but cut short your losses so you don’t have to worry about them?
Sounds too good to be true?
Nope, there is a way. Read on to discover more.
How Do Stop-Loss Orders Work
Traditional investors have been taking advantage of stop losses and take profit orders for a long time. The basic premise is this:
- An investor “buys” a share at £10. He goes long thinking it will increase in value.
- The investor really doesn’t want to lose money so he puts a stop loss order at £8.
- If the stock increases in value the investor is happy and sells it making a tidy profit.
- If the stock decreases in value the investor doesn’t panic because once the stock reaches £8 it will automatically be sold.
That’s how it works with traditional investing and wouldn’t you know it, the system is exactly the same with spread betting. How exciting!
Please always use stop loss orders to protect yourself from extreme losses. There is no reason not to use one especially if you’re investing in a volatile market.
How Do Take-Proft Limit Orders Work
A take profit, limit order is the exact opposite and allows you to bank the profit from your winning spread bet instead of rolling it over. How fantastic!
The take profit limit order is important, but nothing beats the power of stop losses. Stop loss orders are by far the best way to mitigate your risk. When you are only risking a very little of your capital, you will (a) be able to make bigger trades comfortably and (b) worry less about your investment. It is very important to be able to sleep at night without worrying about your investments.
Excitement Becomes Worry
When you first get started you will probably feel excitement but in the coming days that will largely be replaced by worry, regardless of how well you are doing.
Once you get past the initial bit of excitement you’ll start analyzing more. You’ll wonder if you can keep up your good earnings or whether your bad fortune is something you’re stuck with.
Either way, worry starts to set in sooner or later and you’re going to start second guessing yourself. With a stop loss order you automatically prevent drastic losses which means you can eliminate the vast majority of the worry you would otherwise experience. As your trade moves in to profit, you can then move your stop losses to break even and then again to lock in a profit.
When it comes to risk reduction there are several other major factors that come into play. The most important is knowing your investing basics, something we have covered through many of the articles on this site. After all, it’s that important.
The other major thing you can do to reduce risk is diversify. If you’re investing entirely in stocks in the S&P500 and suddenly some poor United States economic news hits the headlines, you are going to experience a sudden drop. Far better to have your bets diversified across numerous indices, commodities, and shares to protect yourself from this. Go international if you’re comfortable and if you’re familiar with Forex that can be a worthy diversification point as well.
When investing, be sure to keep risk reduction at the forefront of your mind. Investors often run into problems because they take risks that are too big. With diversification, being familiar with the basics and especially stop-loss orders you greatly increase your long term chances of success at spread betting.
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