What are Stop-Losses?

Due to the volatility of some markets, a stop-loss is recommended for many types of spreadbets. This is a level at which the bet will be automatically closed if the market moves against you. Often these levels may be subject to some ‘slippage’ if the market moves particularly quickly, and it is not possible for the spread-betting company to close the position in the market. Most companies now offer guaranteed stop-losses, which are guaranteed to close at a certain level. However they usually charge an extra point of two of spread for the priviledge. This effectively transfers sme of the risk of fast-moving markets to the company.

What are Trailing Stops?

A trailing stop is a moving stop that follows the price of an instrument, ensuring that any sudden movement does not wipe out profits already made – effectively locking in profits.

Example:

You think that a rising Oil price will bolster the profits of BP over the coming months, and hence increase the share price.

In July, you place a ‘buy’ bet on BP.L to end in September (you can cash the bet in at any time up till the end of September). The current share level is 590 pence.

You are offered the following price on BP.L September.

Bid: 595 pence Sell: 585 Pence

(Generally the further away the end date of the bet, the higher spread is incurred)

You Place a buy bet at £10 a point at 595 pence.

You Place a trailing stop 20 points away from your buy price. (575 pence)

If the price was fall to 575 pence immediately, with the bid/offer at 580/570 your stop would be hit, and you would lose 595-570=25 * £10= £250

However, if the price was to raise to 670 (675/665) pence, you would be in a position to close at 665-595=70 * £10 = £700

If during this time, your trailing stop would have moved to 650 – ensuring that even a fast downward movement would not wipe out all your profits. Even if the market for BP shares crashed overnight, your guaranteed trailing stop would ensure that you profit by 650-595=45 * £10 = £450.

- About the Author: This article was contributed by Andy of http://www.financial-spread-betting.com, a UK financial website which specialises in offering free guides and information on stockmarket products such as financial spread betting Article Source

Overnight Developments

• Global stocks are lower with the European Euro Stoxx 50 Index down -0.67% and Sep S&Ps down 6.60 points (-0.61%). The markets remain concerned about the European economy with Greek credit default swaps today rising 27 bp to a record high of 959 bp, indicating that the markets are increasingly concerned about a Greek debt default. Meanwhile, the Greek 10-year bond spread against Germany rose by 10 bp to a 1-1/2 month high of 782 bp. Global stocks are also lower on yesterday’s news that US May new home sales plunged by 33%. On the brighter side, April Eurozone industrial orders today rose by +0.9% m/m, adding to March’s +5.1% surge and marking the third consecutive monthly increase. The report boosted hopes for a continuance in the surge in European exports tied to the recent depreciation of the euro.
• The Asian markets today closed mostly lower: Japan +0.05%, Hong Kong -0.59%, China -0.04%, Taiwan +0.10%, Australia -0.14%, Singapore -0.82%, South Korea +0.82%, and Bombay -0.14%. Taiwan’s central bank today unexpectedly raised its key policy rate to 1.375% from 1.25%, as opposed to the unanimous market consensus that the bank would leave rates unchanged. Taiwan’s Q1 GDP soared by 13.3% and the government last month hiked its 2010 GDP forecast to +6.14% from +4.72% and its 2010 inflation forecast to +1.4% from +1.27%. Adding to the news of tighter policy in Asia, South Korea’s Finance Ministry today said that South Korea will “normalize” its accommodative policies and take pre-emptive action against inflation due to stronger-than-expected economic growth. The Finance Ministry raised its forecast for South Korean 2010 GDP to +5.8% from +5.0%.

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