Guaranteed stop

DEFINITION of Guaranteed stop

A guaranteed stop-loss order is a risk management order that is used to help in managing risks when trading the financial markets.

WHAT IT IS IN ESSENCE

Guaranteed stop-loss orders (GSLOs) work in the same way as stop-loss orders. The main difference is that they guarantee to close out the trade at the price specified by the trader, regardless of market volatility or gapping.

This is primarily useful when market conditions are volatile. And prices move suddenly from one level to another, without passing through the level in between.

Price gapping (or slippage) can occur following major market-moving events and news announcements or on weekends when trading is closed.

A basic stop-loss acts as an instruction to your broker to close your position once it hits a set price that is less favorable than the current price.

HOW TO USE

They can be a useful tool, but if slippage occurs, which can happen when a market gaps significantly or hits a period of high volatility, then your order may not be carried out at the price you specified.

Guaranteed stops provide that gaps or volatility don’t impact your position. Guaranteed stops operate in exactly the same way as standard stops.

Unlike regular and trailing stop-loss orders, to add a guaranteed stop-loss order you will need to pay a premium called a ‘GSLO Premium’.

Guaranteed stop loss orders protect you against overnight price movements or gapping. When a price jumps past a stop loss level.

So when considering their use ask yourself: Could the market jump by much more than the guaranteed stop-loss level?

If you know your stocks well, you will have a feel for the likelihood of jumps of different sizes. Guaranteed stop losses will force an order to go through at the specified price even if the market price gaps past it.

Note that spread betting companies typically only offer guaranteed stops on the most liquid stocks.

Don’t expect to get a guarantee on a penny stock.