T2W Trading Community

Locking In Profit - with a stop loss!

Sadly this is a technique that few traders use. I’m not exactly sure why, but there is maybe a misconception that once a stop loss is placed it can't be changed. This is nonsense and one of the key methods of locking in profit in a trade. What does locking in profit mean? Let’s say we have the same trade as before, but instead the market goes in our favour past our original opening price and because it was a LONG trade we are now in a profit position.

All we do is either call the FB or even better go to the website and change the stop loss so that the stop is actually higher (because we went long) then our opening price. This therefore guarantees the profit we have locked into that point.

Opened at 4000 long on the FTSE100 @ £10 Trade. We set the first SL at 3950. Our risk is £500. The FTSE100 goes up to 4100 in a couple of days. We have been wise and have gradually throughout this time increased the SL from 3950 to 4050, locking in a £500 profit.

You can use the same principle for going SHORT also. You just have to think in reverse. You set your stop HIGHER than your opening price and lock in your profit (when its there) by going lower than your opening trade price.

Locking in profit is paramount to your money management when financial spread betting. Always look for chances to lock in profit, it is one of your keys to success.

We have covered the stop loss, but one of the things you must be aware using a stop loss is the following:

The markets move incredibly quickly and if there is a rush on any share, or index or what ever it is, sometimes a panic is started. This panic, good or bad, can send your trade soaring upward or plummeting downwards. Using a stop loss will protect you to some degree when the market is flighty. Lets say we have traded the FTSE100 and for some obscure reason the market crashes badly - a rare thing for an index to crash but not that uncommon should you say be trading in highly volatile instruments such as technology stocks. These can plummet or soar very quickly indeed. For this example though, we will be using the FTSE100 as that is our 'de facto' trade for this course.

Say we opened a trade on the FTSE100 at 4000 going LONG @ £10 per point. Something terrible happens which results in the FTSE crashing and within minutes it starts to plummet.

Of course we were sensible and when we opened the trade on the FTSE we also put in a SL order at 3950. Now the SL will kick in as soon as it can, but and this something you should take note of: with an ordinary stop loss, it is NOT guaranteed that your trade will be closed at 3950. Normally a stop loss is traded close to that number, give or take a few points, because there is a delay between the quote hitting your stop loss figure and the system actually triggering it at current market price, by which time the market will probably have moved a few points. Believe me, a few minutes is as quick as we could ever hope.

However, if like in our example the trade is falling like a stone by tens of points a second, by the time the system has been triggered our SL (at 3950) the market could have dropped much, much further, resulting in a confirmed trade that is well below 3950. This obviously results in an even greater loss than what we had first expected. Which would be our expected loss of £500 plus what ever amount the trade had fallen between the few minutes it takes the FB’s system to acknowledge the closing order.

I am not saying this to freak you out, or to worry you in any way. I have never had any bad surprises like the above. Of course I have had a SL triggered and lost a few extra pounds than I had hoped, but nothing to warrant panic of any kind.

I have given you the above example so that you know what can or could happen if there was a massive swing in the trade. Don't get too preoccupied with the above though as most trades will close very near your stop loss, and if you stick to the more secure trades (any FTSE/Dow Stock or Indices) you won’t have to worry too much, perhaps unless there is a serious incident such as 9/11. If on the other hand, you decide to venture into the more volatile and potentially higher reward areas of financial spread betting (tech stocks and the like) then I would strongly suggest you use the following order on all your 'high risk' trades.