Spread betting and CFD trading has grown rapidly in popularity over the last five to ten years. Faster internet and greater download speeds has made it easier than ever before for people to access the trading platforms that companies operate. This ease of access, coupled with the incentive offered by potentially significant profits, has catapulted spread betting into the main stream.

Of course, the potential for making significant profits comes with the potential for making even more significant losses. If you make a trade and the market moves in the other direction you stand to lose potentially unlimited sums of money.

The defence against this is known as a ‘stop loss’, the stop loss is simply an order that you put in so that if the market moves against you by a certain distance your order is cancelled and you walk away with a bearable loss.

This is the most basic form of stop loss, but there are a few problems. The primary one is that the market may ‘gap.’ This is a rapid jump during which the stop loss level is not hit. So, if you had a loss at 5000 and the market gapped from 5001 to 4999 your stop loss might not be triggered and you might continue losing money.

Most platforms allow you to have guaranteed stops, but you may pay a little extra through the initial spread for the luxury of making sure that your stop cannot be gapped over.

Another problem with stop losses is that if the market moves with you for a little time and then reverses, the stop won’t kick in until the market drops back down to that specific level. There are two ways of dealing with this problem, one is the trailing stop which is a service offered by some platforms. It can be set to run at any distance beneath the market, so if you set it at ten and the market climbs and then dips, the loss will be set ten points below the highest point that the market attains during your trade. This means that any profits you made are ‘locked in’ by the trailing loss.

If you trade with a platform that doesn’t operate a trailing stop, you can always do it yourself simply by updating the stop as you go. A good tip is to stick to your strategy, if you’re confident in your trade then don’t get trapped into really tightening the stop as a brief fluctuation could cancel your trade even though the trend continues. So make sure that you keep your stop at a good distance, and if you’re not sure, a lot of training resources offer advice for how close or distant to have your stop.

Stop losses are a vital part of spread betting, and if you want to be a good trader you need to understand how to use them to fully protect your positions.

Take a look at the Tradefair website for more information on spread betting. Who knows, if you trade successfully, you may even be able to finance that trendy home redesign that you’ve been wanting.