Brokers offering platforms featuring guaranteed stop loss orders are an option for traders who aim to limit their trading risks. This built-in risk management feature is a great way to avoid excessive losses when trading complex assets.
This guide to brokers with a guaranteed stop loss feature explains how they work, their benefits, and how they compare to other risk management tools. We will also list the best brokers that offer guaranteed stop loss orders.
A Guaranteed Stop Loss Order (GSLO) is a risk management mechanism designed to protect you from big losses. Trading currencies or other assets can be very risky, so traders such as yourself need an effective tool to minimise your costs and keep your net profits high. The main problems in trading are gaps and slippage, which can quickly lead to much larger losses than you expected.
Gaps appear when the price of an asset suddenly jumps from one price to another in a highly volatile market. This usually happens right after major world events and economic news. Slippage, on the other hand, is the difference between the expected execution price and the actual execution price. When the market is volatile, positive or negative slippage can occur.
A stop loss order will limit your losses to a certain level if the markets move against you. However, in the event of a significant gapping, your broker may not be able to close your position at the desired price. This would result in a greater loss than was calculated when placing the order. But brokers with guaranteed stop loss orders (GSLO) will absorb this price difference.
The following example illustrates how a guaranteed stop loss order works with your broker:
Suppose a trader buys 1,000 shares of Ryan Air for £10, or a position of £10,000. She then places a guaranteed stop loss order 5% below the stock's entry price.
Suddenly, the market falls apart and experiences a quick bearish drop, with the new stock price becoming £8.25. In this case, traders who don't have a stop-loss order may rush to sell, which will likely lead to a further decline in price and therefore a larger loss. Those with regular stop loss orders will see their positions closed at £8.25. However, with a broker with guaranteed stop loss orders, the closing price would have been £9.50.
By doing some calculations, the investor saved the difference between his guaranteed exit value and the market price at which the asset fell. This works out to £9.50 - £8.25 = £1.25 per share or £1,250 in total, which is a lot of money going up in smoke for nothing!
Guaranteed stop loss orders are useful, but they aren't the only risk management tool you can use. We find that using a combination of different approaches is often the best.
A take profit order is a limit order where you specify the profit at which you want to close a position. If the price reaches the limit, the broker automatically closes the trade. This protects you from a sudden and unexpected drop before you have time to close a profitable trade. This can improve your bottom line profitability and help you stay objective, preventing emotions like fear or greed from driving your decisions.
Hedging is another way to manage risk. It consists of offsetting trade losses with positions opposite to the main position. This acts as a kind of insurance, so you don't suffer such a negative impact if the market doesn't go your way.
Although hedging doesn't protect against all losses, the impact of huge declines is reduced. A hedge position creates an effective risk management tool, but it also reduces potential profits.
For effective risk management, find a broker that offers both trailing stops and guaranteed stops and combine them. Trailing stops describe a type of order where the stop loss price is not set at an amount but at a level that's higher or lower than the market price. This means that if the value of the asset increases, the trailing stop also increases. But when the value starts to fall, the trailing stop remains fixed and you're still protected at that price. This allows you to lock in profits when prices rise without closing the position.
Here are a few tips for using brokers that offer guaranteed stop loss orders when you trade:
The main benefit of using guaranteed stop loss orders is that they prevent you from losing too much money in your trades. In highly volatile markets, brokers that offer guaranteed stop loss orders protect traders from gaps, ensuring that the expected risk is the maximum taken.
When you set a guaranteed stop loss order, you accept what you are willing to lose; it is impossible to lose more than that.
Trading with a guaranteed stop loss is perfect for those who cannot constantly monitor their positions. When a trigger point is set, there is no need to closely monitor market fluctuations, as your trading ends automatically.
If you don't want trading to become a full-time job, using guaranteed stop losses is often a wise option.
Using a guaranteed stop loss allows you to be more objective in your trades. When you watch stocks yourself, you can be driven by emotions and the hope that the market will change. This type of mentality can lead to greater additional losses. With trades that are closed automatically, no emotions come into play.
Brokers set a minimum distance for guaranteed stop losses. This is the minimum distance the stop loss can be from the current market price. This minimum changes with expected volatility and widens as the market becomes more volatile. If this minimum is too high, it may result in a guaranteed stop loss order which is not particularly protective.
Brokers often charge their traders a premium for the use of a guaranteed stop loss order, which is triggered when the stop loss order is hit. This premium is generally low, but it varies from broker to broker; choose one with a lower premium. You can also close a position before the stop loss is triggered to avoid paying the premium.
Setting your guaranteed stop threshold near the current price minimises losses and is a safe way to trade. However, this also means that short-term fluctuations in stock prices, for example, can trigger it and unnecessarily eject you from a trade. The key is to set your stop at an amount that allows some fluctuation while minimising your overall risk.
Choosing brokers with guaranteed stop loss orders is a useful way to limit risk, but it is not the only comparison factor. Below is a rough guide of some of the other features that may influence your decision.
Brokers that offer guaranteed stop loss orders enable their traders to set in stone the risk taken by any position. These types of orders can also reduce substantial losses caused by strong market fluctuations or emotion-based trading decisions. We have found that the optimal way to use brokers with guaranteed stop loss orders is to set them at a limit that minimises losses but doesn't risk a premature exit due to small short-term volatility. We also recommend using a range of risk management approaches in combination to best maximise net profits.
Guaranteed stop losses protect your open positions by ensuring that they are closed if the market falls below a predefined point. This means that regardless of significant volatility and gapping, you will not face an unexpected loss.
If your guaranteed stop loss is triggered by the market falling beyond the point you've set, the broker will charge you a fee, called a premium, for using this service.
Guaranteed stop loss orders are useful in volatile market conditions because prices can move up and down very quickly, sometimes faster than the platforms can keep up with them. When a guaranteed stop loss order is in place, you'll never lose more than what was expected when you opened the position.
When used correctly, guaranteed stop loss orders are a great way for beginners to trade without taking on excessive risk. Regardless of the level of investment, they are effective in minimising losses.
You will only pay the guaranteed stop loss if it is triggered by the market falling to that point or below. If you exit the trade before this happens or the market does not go down, you won't pay for the use of a guaranteed stop loss.