Guaranteed stops. Are they worth it?

[seancass]

I have a huge decision to make over the weekend and I wonder what other traders views are re: the costs incurred in guaranteeing stop losses.

I opened a CFD account with IG Markets three weeks ago and I am swing trading FTSE 250 stocks with a good degree of success. I have no complaints vis-a-vis IG and I've enjoyed trading with them. My positions can run anywhere between a few hours and a few days. A couple of my current positions have been on for over a week.

However, when I looked at my account this morning I saw that I had paid £451.87 in costs of which £300 is guaranteed stop loss premiums; the rest is in commissions, £10 each time I hit the button to open or close. No losing trades thus far, and using only a small portion of my capital available by way of deposit on each trade (usually anywhere between 5 and 10%) I have made just over £2,000 in three weeks. I could have made £2,300 had it not been for the guaranteed stop premiums (they're insurance premiums.) But, I'm assessing this morning whether I really need guaranteed stop losses when I am able to check my positions throughout the day. I guess the only reason that I sign up for these hungry beasts is so that I don't worry too much about overnight gaps. Gaps, such as they've been - and there tend to be gaps up or down when the market opens - have not been sufficient to trigger any of these stops. So, I wonder if I'm wasting money by opting for guaranteed stops on FTSE 250 stocks which have reasonable liquidity.

I suppose the other thing worth investigating is enlarging the positions and reducing the number of trades to control commissions and make each trade more cost effective.

I'd be interested in the views of other traders. Thanks

 

[ZEPPO]

Personnal preferences

I guess it all comes down to personal preferences; I trade the FTSE100 through Finspreads and always put in a Guaranteed Stop loss - even though I put it a good 4% or 5% away; somehow, I can sleep better at night.
However, were I to trade futures someday, I know that I won't be able to do that, and have to accept the extra risk - or not trade Futures at all!
With IG Index, you have a choice of account; with a Credit account, you can choose wether to put your stops guaranteed or limits; if you have a Standard or Limited Risk accounts, you may not have such choices, and will have to accept the extra premium of a guaranteed stop, or change to a Credit account.
From there, I guess that it is question of experimenting - try both types of Stop losses, and stick with the one you feel more comfortable.

Eduardo.

 

[seancass]

I guess it all comes down to personal preferences; I trade the FTSE100 through Finspreads and always put in a Guaranteed Stop loss - even though I put it a good 4% or 5% away; somehow, I can sleep better at night.
However, were I to trade futures someday, I know that I won't be able to do that, and have to accept the extra risk - or not trade Futures at all!
With IG Index, you have a choice of account; with a Credit account, you can choose wether to put your stops guaranteed or limits; if you have a Standard or Limited Risk accounts, you may not have such choices, and will have to accept the extra premium of a guaranteed stop, or change to a Credit account.
From there, I guess that it is question of experimenting - try both types of Stop losses, and stick with the one you feel more comfortable.

Eduardo.

Some might say that 4 to 5% is a large stop but then it is less likely to be hunted by the spreadbetter. One plus side of the guaranteed stop loss is that there is a minimum distance at which it may be placed ranging anywhere from 5 - 12.5 %. The 5% minimum stop loss tends to apply to the large caps with good momentum. Placing stops too close to the action can often prove a double edged sword.

 

[fibonelli]

Hi Seancass,

Compare the likely total premium costs over a full 12 months and compare this to the likely drawdown in the event of a 1987 type collapse of your typical open positions. For example, if you have incurred £300 premium in 3 weeks, this may indicate a yearly cost of £5,200. The question is how much would you lose in a 1987 event in a year? How many 1987 events can you incur before you exceed the yearly premium costs?

Regards F

 

[seancass]

Yes, that's all part of the equation. We live in uncertain times and a crash is at the back - and often the fore - of people's minds. I am beginning to think that fewer larger trades, letting them run instead of dipping in to snatch a couple of hundred quid when it reaches that point, is the way forward. That way, the guaranteed stops can be left in situ which offers peace of mind.

 

[ZEPPO]

All the way to Oz...

Some might say that 4 to 5% is a large stop but then it is less likely to be hunted by the spreadbetter. One plus side of the guaranteed stop loss is that there is a minimum distance at which it may be placed ranging anywhere from 5 - 12.5 %. The 5% minimum stop loss tends to apply to the large caps with good momentum. Placing stops too close to the action can often prove a double edged sword.

Quite right, seancass; first I backtest the strategy, and very often with a narrower stop I would have ended up with a losing trade.
On the other hand, a Guaranteed Stop loss tells me exactly how much my risk is for that trade - period; the market can drop all the way to Australia, for all I care, my back is covered.
Maybe it's me, but I prefer to worry about my losses; my profits can take care of themselves, I think - so far, they have.

Eduardo.

 

[rog1111]

Hi Seancass

It seems like your strategy is doing just fine, so I wouldn't change it. Although personally I would forget the expensive stop guarantee. Every now and then you'll suffer a little exit slippage, but since you're well funded by the sound of things, and you are spreading your capital over multiple positions without overcommitting, then the damage suffered should be fairly minimal. Presumably you are holding both long and short positions ?

Good luck !

rog1111

 

[seancass]

Rog1111

Strangely, all of my positions are long. Currently I have eleven positions open over the weekend and they are all long, and yet there are undoubtedly some excellent shorting opportunities. Only one is giving me concern - Admiral - which I have held on to as it is, in my opinion, about to go north again. Last week it scared me to death but the charts showed me that the longer term uptrend was still intact. The short term down trend has now broken too and it would seem that the stop running is over.

I'm still uncertain about these guaranteed stops, as they all add up to a tidy sum in premiums. Nevertheless, I suppose I must look upon them as a business cost.

 

[seancass]

Roger,

Sorry, I've just realised it's you! How are you? Good to know, like me, you still haunt the boards. I'll PM.

Best,
Sean

 

[Silent.Trader]

Compare the likely total premium costs over a full 12 months and compare this to the likely drawdown in the event of a 1987 type collapse of your typical open positions. For example, if you have incurred £300 premium in 3 weeks, this may indicate a yearly cost of £5,200. The question is how much would you lose in a 1987 event in a year? How many 1987 events can you incur before you exceed the yearly premium costs?

I don't think this is a very sensible approach. You may well assume that the company offering these guaranteed stops will make a bit of money out of it. As such guaranteed stops are too expensive and you'll loose out on them.

Basicly it's, as Zeppo stated, a matter of personal preference. Where the preference may well be rooted in the trading style and position that one has. With heavy leveraged position and a '87 style crash (indexes gapping up to about 30% down) you may well end up with huge debts. That prospect is far from pleasant, but can be overcome if one has a proper job and the debts stay limited. If you have no job, try to live of your investments and you end up with a bunch of debts you may have a huge problem. Guaranteed stoplosses are an insurance against the proverbal black swan. When living of your investments and applying heavily leveraged strategies I think a guaranteed stop loss of some sort is essential.

grtnx
Wilco