Example: Stop Orders

Stop-loss

Here is a simple scenario explaining how our Stop orders work.

Example: 'Buying' US Light Crude Oil with a Stop

Say you want to buy £5 per point of US Light Crude Oil at 4900. Normally this would require a deposit of £750 (150 (deposit factor) x £5 (bet size)).

To reduce this initial payment, and to offer some protection against adverse market movements, you decide to place a Stop 50 points away at 4850. As this is a non-guaranteed Stop, you do not pay a dealing spread premium, but you have to take into account the possibility of ‘slippage’.

So to work out your new deposit factor, simply take the distance of your Stop from the opening price and – to take into account the potential for slippage – add 15 (10% of the normal deposit factor).

This means that the deposit required would drop to £325 (65 (new deposit factor) x £5 (bet size)).

You open the bet as the UK markets are starting to get going, but moments later China announces substantially lower-than-expected economic growth figures. On the back of this news, the price of oil begins to drop almost immediately. The market gaps repeatedly, and just 30 minutes later the price plummets through your Stop to 4825 before stabilising at 4730 after an hour.

Because you chose not to pay a premium to make this a Controlled Risk bet, your position was affected by slippage and closed at 4825, 25 points worse than the level of your Stop. Your total loss was £375. However, without this Stop in place, had you closed the position at 4730, your loss would have been £850.

Trailing Stop

Here is a simple scenario explaining how to 'lock in' profits in volatile markets using a Trailing Stop.

Example: 'Buying' EUR/USD with a Trailing Stop

Say you 'buy' our EUR/USD at £20 per point for 1.3581/1.3583, choosing a Trailing Stop distance of 30 points and a Step size of 10 points. The Stop initially sits 30 points behind your opening price, at 1.3553.

Immediately the Euro starts to strengthen against the Dollar. Very soon our price has risen to 1.3593 (10 points above your opening price) and your Stop 'steps' up by 10 points to 1.3563 to re-establish a 30-point distance from the new market level.

The rally continues and by lunchtime EUR/USD is trading at 1.3646/1.3648. Your Stop has therefore moved automatically five more times and you are now sitting on a healthy potential profit with your Stop waiting 33 points behind at 1.3613.

A surprise announcement that Eurozone industrial output growth has fallen suddenly sends the Euro plummeting and within minutes the EUR/USD is trading back down at 1.5591/1.5593.

Your Trailing Stop has kicked in and your position is closed 33 points below the recent high at 1.3613, still well above your opening price of 1.3583.

Your profit on the trade is calculated as follows:

Profit on trade

Closing level	1.3613
Opening level	1.3583
Difference	30

Profit on trade: 30 x £20 per point = £600

With a conventional Stop Order, unless you had moved it manually, you would still be in the market, looking at a relatively small paper profit. By contrast with a Trailing Stop you are able, in this scenario, to profit from a volatile market.

Remember, Trailing Stops are subject to slippage and therefore could result in losses that exceed your initial deposit should the market move sharply against you.