A "whipsaw profit" in the making on Chemring?

In my Position Trading book I raise the possibility of notching up whipsaw profits by employing guaranteed stop orders. These are ‘notional’ profits (i.e. avoided losses) that accrue when the spread betting company is obliged to stop you out at your guaranteed stop order price at a time when you can re-purchase immediately at the more favourable gapped-down price in expectation of a subsequent rebound.

Here is a concrete example:

This morning on 28 August, the price of Chemring shares gapped-down by almost 30 points to 340p-per-share. My guaranteed stop order with Capital Spreads took me out at a price of 354.5 for a loss of £9.60 on the position that I had opened originally at 364.1. Yes, I took a loss, but so did they, to the tune of £14.50… minus the cost of granting me the guarantee in the first place, so let’s call it quits — I took half the hit, and Capital Spreads took half the hit on the slippage. Without the benefit of the guarantee on my stop order, I would have taken the entire hit.

What could have happened next is that I could have re-bought immediately, at the gapped-down price of 340p-per-share, the stock that I had just sold (by stopping out) at 354.5p-per-share; what you might call “selling high and buying low”. But I didn’t, because I went out for the day, and when I returned I had no choice but to buy back at an even lower price of 324.5p-per-share.

I have no idea what will happen next, but I know that I did better than if my original stop order had not been guaranteed, and I did better than the “investor” who simply held through the entire fall.

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Disclaimer: this posting is for general education only; it is not trading advice.