Over on my “Talk with Tony” page, Martin asked a question that I think deserves a fuller answer here in the form of a blog post. Unless I’m mistaken, this is the same Martin who just reviewed my Better Spread Betting and Position Trading books over on Amazon.co.uk. Thanks, Martin, but unfortunately your cheque is not in the post.
Anyway, his question was:
I most often bet on small caps with hefty spreads (2% to 3%). Being a cautious guy I usually opt for the guaranteed stop-loss which increases the spread still further to up to 4%.
My issue is, as I being daft using Guaranteed Stops most of the time?
I Position Trade (along the lines described in your book) and was wondering whether you feel that the risk of suffering as a result of occasional carnage from slippage from a non guaranteed stop, is sufficiently offset by savings made on the spreads on all your other non guaranteed bets (where maybe little or no slippage occurs)?
My answer is:
It’s very difficult to compare like with like when trading different stocks in different accounts at different times under different market conditions. But I have a few observations to share.
When running a demo position trading account in 2010, it worked great in the first three months while operating in a now-defunct Shorts & Longs (now part of SpreadEx) account that had mandatory guaranteed stop orders — despite the increased stop distances and unusually-high financing charges in that particular account. To my surprise, the strategy worked less well when I switched to an account with lower financing charges and no mandatory guaranteed stop orders. From what I recall, a positive side-effect of the mandatory guaranteed stops in the first account was that I enjoyed several “whipsaw profits” (which are described on pages 91-92 of the Better Spread Betting book and on pages 96-97 of the Position Trading book).
These days, on a platform like IG Index which gives the option but not obligation of using guaranteed stops, I would be inclined to use them only to insure this risks I can’t afford to take — like a £10-per-point bet on a 1000p-per-share stock that might suffer a price shock. Otherwise I would use regular stops while simply diversifying the danger away on a larger number of smaller stakes on lower-price equities.
Back to the first part of Martin’s question, I would remind him that platforms such as Capital Spreads and InterTrader are fairly unusual in allowing you to guarantee your existing stop orders retrospectively, so you don’t even have to commit to or pay for a guarantee until you really need it – e.g. just before the close-of-play when you risk an overnight price gap. By which time you might have notched up some profit to pay for the guarantee.
Disclaimer: this posting is for general education only; it is not trading advice.