Should I Use Guaranteed Stops?

In this article, I’m going to explain the why, when and how of using guaranteed stop losses.

These type of stops are offered by UK spread bet brokers, so if you’re not in the UK this article may not be relevant to you!

For those based in the UK or able to use UK brokers, there are a number of brokers who offer guaranteed stops, such as IG, CMC Markets and CityIndex. For the purposes of this article, I’m going to explain the facility offered by IG – please bear in mind, this is not a recommendation for any particular broker and you should always do your own due diligence.

So what are guaranteed stops?

As the term suggests, the price that you want your trade to be stopped out at is guaranteed to be honoured. It doesn’t matter if the market gaps 1000 pips over the weekend, volatile news is released or there is a “black swan” event – your maximum downside risk is known from the moment you open your trade and will never worsen.

The benefits of this are huge! For one, it means you will sleep more soundly at night. It also means you can hold longer term trades without the fear of some random event decimating your account.

That sounds almost too good to be true – there must be a catch?

Well unfortunately there is! …

In return for guaranteeing your absolute maximum loss, the spread betting company stipulates a minimum stop distance. That is, the minimum distance away from the current market price that you will be allowed to place your stop when you open the trade.

The minimum stop distance changes with expected volatility. At the time of writing (15 minutes into the New York equities session), the minimum stop distance was 20 pips on the EUR/USD and 2.5 points on the S&P 500.

As we approach volatile news, the minimum stop distance gets wider, and it’s not uncommon for it to be 170 pips on the EUR/USD coming into key economic data or hundreds of pips into an election weekend. This means you would not be able to open a trade and place your stoploss any closer than 170 pips at that point in time.

On the flip side, I’ve seen IG’s minimum guaranteed stop distance at 5 pips during really slow markets.

The good news is that if you open a trade during a quiet time when the minimum stop distance is really small, say 20 pips… your stoploss will stay that size even if trading conditions change and IG wacks the minimum stop distance up to 170 pips or more.

Guaranteed stop premiums

One thing we haven’t discussed is the premium that IG charge if your guaranteed stop gets hit. At the time of writing, it was 1.2 pips on the EUR/USD. So trading at £10 a pip, you will pay a premium of £12 – no big deal!

There’s also nothing to stop you closing out a trade before your stop gets hit – in which case you won’t pay the premium.

When do I use guaranteed stops?

I use guaranteed stops for higher timeframe trades I intend to hold overnight, for longer periods of time or into volatile news, world events and weekends.

These swing trades generally have larger stoplosses and there usually isn’t a problem with the minimum stop size.

In fact, if you are trading with high leverage, I would say it’s absolutely essential to use guaranteed stops or some other form of risk protection (such as options) if you are holding into a volatile event.

Day trades

If I’m taking a day trade or scalp that I intend to close before the end of the day, then a guaranteed stop would not usually be feasible. This is because my day trade stops will be around 10-40 pips, which is sometimes less than the minimum allowed stop size. Additionally the stop premium of typically an extra pip will eat into my profits.

However, sometimes I will enter a day trade with a guaranteed stop if there is a possibility of holding a portion of the trade for longer.

The “Halfway House”

For lack of a better phrase, I have called this the “Halfway House” method. There will be times when a day trade provides an entry into a higher timeframe setup and it may be possible to run the trade for a bigger target. This is exactly the situation where I would use the “Halfway House”, because I do not want to be exposed to slippage or gaps if I end up holding the trade overnight or over the weekend.

The halfway house is employed when the broker’s minimum stop distance restricts me from placing my guaranteed stoploss at the correct location. In this case I will enter the market with a larger stop (as dictated by the broker) which will act as my “emergency stop”. I will have a “mental stoploss” price in my mind for the correct exit location, and if the market trades there I will close the trade manually.

If the trade goes into profit, I can gradually reduce the stop size until the stoploss is at the area I originally wanted it to be. If on the other hand the trade goes against me, I will be ready to cut the trade at my mental stoploss level.

In the example below, the supply zone was 10 pips wide, and we assumed the broker allowed a minimum guaranteed stoploss of 20 pips. This meant we could not place the stop directly above the supply zone as per the supply and demand strategy.

So a wider guaranteed emergency stop (1) was used and a mental stop (2) was employed. If the market moved above the mental stop, we would close the trade out manually. However, if the market moved 10 pips in our favour (4), we would be able to decrease the guaranteed stop to the correct position above the yellow zone, still obeying the broker’s 20 pip minimum stop size rule.

Of course, if the market suddenly shoots up, then our emergency stop will get hit before we can react to close the trade, and that’s the small-ish risk we take.

DYOR

As always, before investing your hard earned money in the market, you should always do your own research and check your broker’s individual rules regarding guaranteed stops. Rules will vary from broker to broker.

I hope you’ve enjoyed this article. If you found it useful, please share it on social media – thank you!

Further Your Trading Knowledge

Learn the full strategies, including advanced supply & demand concepts, market structure, how the smart money manipulates the market and how to apply these concepts to Forex, Stock Indices, Commodities and Crypto Currencies. Find out more here: Trading Education Page