guaranteed stop in Contract for Differences trading
A guaranteed stop is an order that guarantees that your trade will be closed out at the level you have specified, whatever happens. This is often used when trading CFDs, since the leverage offered in this type of speculation can lead to large losses, and these orders can help you avoid large losses if the market turns against your trade.
A guarantee stop is a kind of ‘extra’ order that you can place on your deal ticket alongside your normal stop loss and take profit orders. However, the difference with a guaranteed stop is that it eliminates the risk that your order will be missed by the market due to slippage or gapping (see our glossary for more information on these terms). Instead of letting your order slip away from you and potentially suffering large losses as a result, a guaranteed stop is executed at the price specified on your order ticket irrespective of any market volatility or gapping that may occur.
For example, you might have bought a Contract for Differences in Company A whose share price is currently at PS10. But the FDA decides to reject the drug that this company is trying to sell because of safety issues and the share price plummets by 15%. If you have a guaranteed stop at 5% below your entry stock price, the broker will close out your trade at PS10, limiting your potential loss to 10%.
What is a guaranteed stop in Contract for Differences trading?
Traders who use a guaranteed stop will usually be charged a small premium to use this feature, as the broker is taking on some of the risk of losing their client’s money. The premium is typically a small percentage of the trade size and varies from one broker to another.
To use a guaranteed stop, open the deal ticket on your platform and select the direction of the trade – either Buy or Sell – and then the price you wish to exit at, along with the quantity. When you are ready to place your order, tick the guaranteed checkbox.
At its core, a CFD is an agreement between two parties—typically the investor and the broker—to exchange the difference in the value of an underlying asset from the time the contract is opened to the time it is closed. If the price of the asset rises, the buyer (the investor) profits; if the price falls, the seller (the broker) benefits. Essentially, the contract reflects the price movement without involving ownership of the asset itself.
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You can also combine a guaranteed stop with other kinds of orders, such as a stop order or an iceberg order. Iceberg orders allow you to camouflage a very large order by splitting it into smaller tranches, with each tranche charged at the same commission rate as the rest of your order. This can be particularly useful during periods of expected or high market volatility when the risk of missing your stop loss is higher.