Understanding risk and reward
Setting stops
If you haven’t yet watched the video at the beginning of this course, we recommend you do so before continuing with this lesson.
A stop order is an instruction to trade when the price of a market hits a specific level that is less favourable than the current price.
IG offers three types of stops:
- Basic stop: this is triggered when the market reaches your set order level. There’s no additional cost to use a basic stop, but the market can close at a worse price than the level you requested. This happens if the market ‘gaps’ or moves quickly from one price to another, so you risk losing more money than you anticipated
- Guaranteed stop: this type of stop will ensure that your position is closed at the exact level you’ve specified. If your guaranteed stop is triggered, you’ll pay a small premium
- Trailing stop: the stop will automatically follow your position if the market rises and close out your position if the market moves against you, thereby helping to secure your profits
You’ll find the option to place a stop order on your deal ticket on our platform:
Example
Imagine the following scenario: let's say you take a long position and the market immediately starts to rise, putting you into profit. Then, suddenly it goes into a sharp reversal, and to your dismay, your profitable trade rapidly becomes a loss. It’s natural that you hope the market will recover, but that can often lead to an even bigger loss as prices continue to fall. Finally, it’s clear that prices aren't coming back anytime soon, and you have no choice but to realise a loss.
One way to help avoid this issue is to set up a stop while executing a trade – before opening a position, so it’s never left unprotected.
With a stop-loss order in place at your pre-defined exit level, you don't have to make a decision about what to do if that price is met. You've done your planning in advance and your position is closed for you.
Lesson summary
- Set a stop to close a position automatically for you
- You can use three types of stops on our platform: basic, guaranteed and trailing
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