Financial spread betting without orders would be very risky indeed. You may have noticed this message all over spread betting company websites “Spread betting, CFDs and FX are leveraged products and carry a high level of risk to your capital. It is possible to lose more than your initial investment. These products may not be suitable for all investors, therefore ensure you understand the risks involved and seek independent advice if necessary.” It’s worth comparing the spread betting order so that the risks can be reduced and the rewards amplified. Orders are triggered automatically so the trader doesn’t even need to be there. Let alone worry about the risk.
The word leverage here, means that the value of the bet can be worth more than the amount actually staked. It has a similar meaning when a company borrows money to boost profits. The company uses leverage. Spread betting works in a similar why. Say you decide to spread bet the FTSE 100. You buy the market at 1£ per point. The market rises 10 points by the end of the day. At the close of trading your spread bet will be worth £10. If you close your bet you will get nearly a £10 profit for only a £1 stake. That’s leverage. Of course it works the same the other way. It’s not only profits that get magnified it’s loses too: a reason why spread betting can carry a ‘high level of risk’. This leads us nicely to the point of spread betting orders.
There is only a high level of risk if you don’t use spread betting orders properly. Most of the orders mentioned below should be available with most spread betting brokers.
One key principle of spread trading is to manage risk. Put simply, reduce loses to a minimum on losing trades and increase the number of profitable trades. There will always be loosing trades! Unfortunately.
The stop order
The stop order allows the trader to stop a trade by exiting at a specific point. The trade can be closed at a specific price chosen by the trader. The stop loss has to be placed below the spread betting companies spread. This will become apparent when an account is opened.
There’s a but… if many orders hit the market at the same time the price can gap up or down. This can move the market past the stop order. The rule is normally first come first served. The traders order might not get filled. A very uncomfortable situation can result especially if the market drops like a stone. Nobody wants to lose sleep at night do they?!
The solution to this is the guaranteed stop order.
The guaranteed stop order
The spread betting broker guarantees that your order will be filed. It costs a little bit more. Normally the spread betting broker will charge a slightly larger spread.
The next two spread betting orders help the trader get into the market. Important when it comes to maximising winning trades.
The limit order
The trader can set the price at which they want to open a buy or sell trade. It has various uses including being able to specify a maximum buying or selling price when the market is volatile. The limit order works on a ‘no worse than’ price basis. If you have spotted a price trend and there is a point of resistance where you would like to enter a trade if the markets breaks above this point. By placing a buy limit order just above this point the trade will be opened at a price no lower than the level specified.
The market order
Either going long (buying) or short (selling) the market order will get you into the market. The entrance point would be at the bid or offer price at the time. It’s easy and there would be no problems normally if the market isn’t really volatile.
Professional spread traders can use a range of orders to help control the timing of entry to and exit from the market. Those learning spread betting should compare these simple spread betting orders before moving onto using more complex tools.