This is a bet, similar to a guaranteed order, where a spread betting provider will guarantee that after a certain price level is reached, you will exit a spot. This eliminates the risks associated with uncertainty, but to place a stop order on a bet, there could be a small fee added to the bet.

The majority of profit opportunities in the markets bear a certain amount of risk, by definition. The only mechanism we have real leverage over when trading is risk management. Our risk, but not future price movements, can be regulated.

Traders should use stop-loss orders in all trades to keep losses low and expand their money. Did you know, however, that during all market situations, such as when breaking news reaches the market, a daily stop-loss order does not cover you, uncertainty unexpectedly rises, and markets open up with a gap?

Let us implement guaranteed stop-loss orders-orders that are always guaranteed to close a losing position at your pre-specified stage.

What is Guaranteed Stop Loss order?

A guaranteed stop loss order is a form of stop loss order that, regardless of uncertainty and slippage, is executed exactly at the pre-defined price level. They work in the same way as standard orders for stop-loss, except when using GSLOs, your exit point is guaranteed.

A standard stop-loss order is an order that sells the underlying instrument when you’re long and buys the underlying instrument when you’re short at a pre-specified price level. They’re used to controlling the risk and managing your losses.

However, the bid/ask spread of your traded instrument will expand dramatically in periods of large market uncertainty and increased slippage, such as around the release of significant market data, and cause a daily stop-loss order at an unfavorable stage.

Let’s assume you go long at 1.1520/22 EUR/USD, which means you purchase euros for $1.1522 (the request price). For example, a stop-loss order put at 1.1510, would not be activated until the bid price (the price at which buyers want to buy an instrument) exceeds the stop-loss stage. This implies that stop-loss orders use different prices-they buy in short positions and sell in long positions-to close a position.

Spreads & Slippage

Although standard stop-loss orders work just fine most of the time, unpredictable market conditions can dramatically expand the bid/ask spread and cause your stop-loss at a price level that is very unfavorable. Traders may use guaranteed stop-loss orders to escape this risk, which will close your position and limit losses precisely at your pre-defined price level, irrespective of underlying market conditions.

A so-called “GSLO Premium” is expected by most brokers to use guaranteed stops. The GSLO Premium helps cover a part of the risk as the market and directional risks increase for the broker as traders use guaranteed stop-losses. Some brokers providing guaranteed stops will only charge you for using them if they cause your stop.

The GSLO premium is determined by multiplying the number of exchanged units with the GSLO Premium Rate (position size). GSLO Premium = GSLO Premium Rate x Dimension of Place.

Market Gaps

Guaranteed stop-loss orders work particularly well when markets vanish (or jumping). Imagine a market-moving occurrence, like a natural catastrophe or a sudden rate cut, happening after the market has already closed. As traders and investors are searching for a new equilibrium level to discount the new case, markets will always open with a large gap to the upside or downside.

A disparity is essentially a price gap between the last closing price and the current opening price. When fresh news gets discounted on Monday with the market open, it is not uncommon for the stock or FX market to open with gaps after the weekend. During those periods, guaranteed stops will help restrict your losses.

Pros and Cons of Orders for Assured Stop-Loss:

Pros:

1) Assured stop-losses in times of high market uncertainty restrict your losses

2) They can be used to design an efficient strategy for risk management

3) Even though markets are gaping, assured stop-losses protect the money

 

The Cons:

1) For the use of guaranteed stop losses, brokers normally charge a small fee

2) Normal market conditions do not require a guaranteed stop-loss in most situations.

3) You do not need assured stop-losses if you trade with little to no leverage.

Summary

Guaranteed stop-loss orders are an efficient instrument in periods of high market uncertainty to keep the losses and risk under control. In comparison to standard stop-loss orders, the execution of which depends on the current bid/ask spread, guaranteed stops will always close your trade at the pre-specified price level, so you can continue to trade without thinking about future market conditions and slippage.

You can use guaranteed stops in all of your transactions for a small fee and get a guaranteed exit if the market turns against you. Depending on your own risk perception, risk control, and trading approach, whether or not you can use them.