In life there are very few guarantees and generally when it comes to trading nothing could be truer. Contracts for Difference or CFD trading do in fact offer a guarantee and today we’re going to look into the use of guaranteed stop losses when trading CFDs and if in fact you need to use them.
Are Guaranteed stop losses when trading CFDs legitimate?
We just mentioned that there are no guarantee’s in life yet when it comes to trading CFDs many CFD brokers do in fact offer a guaranteed stop loss. The reality is they are legitimate and yes the CFD brokers will honor those stops as they nearly always charge you a premium for that privilege.
What is a Guaranteed Stop Loss or GSL?
A GSL simply means you put in a stop loss at a price a certain distance away from the current price and if the market gaps over your stop loss then the CFD broker will honor the stop you had at your guaranteed stop level, even though the market never traded there.
What is an example of a Guaranteed Stop Loss?
Let’s say you are in a CFD position and the current price is $10.00. Most CFD brokers require you to place your stop loss a minimum of 5% away so we’ll take it that your GSL is placed at $9.50. The market may gap down the next day following a negative announcement or adverse move on the Dow Jones overnight. Your stock opens at $9.20 leaving you with an unexpectedly high loss. Since you have your GSL in place, your CFD broker will actually get you out at your nominated level of $9.50 saving you an extra 30 cents on the trade.
How much does a Guaranteed Stop Loss cost?
Normally your broker will charge a premium for using a GSL and will range from 2-5 times more than standard brokerage. Consider this your ‘insurance’ against a larger than normal loss.
Do professional traders use GSL’s?
As a rule a professional trader will do everything in their power to keep their trading costs down and GSL’s simply increase the cost of doing business. As a rule professional traders under 95% of circumstances do not use GSL’s due to the increased costs and the fact that most stocks don’t gap more than 5% daily. Imagine paying extra for a service that happens irregularly on the Australian stock market. You’d be paying a whole lot extra for your brokerage without ever needing that protection.