One Extra Reason To Use a Stop Loss Order

Published by Filipe R. Costa on Fri, 13/05/2011 - 12:31
stop loss

There are many reasons to use a stop loss order. The main idea behind them is to avoid losing more than you can afford or more than it is recommended in a single trade or bet. Risk management and portfolio rules dictate that we should go out of losing bets at some point instead of letting them roll until our funds are completely burned out.

In an earlier article I wrote about the main reasons that should lead us to set stop loss orders in spread betting. Today I’ll add an extra reason that most of us don’t think about but is of equal or more importance.

Financial spread betting, as most trading nowadays, is done through the internet. You manage your account, set your orders, make deposits and withdrawals, and do the necessary research through that channel. There is a computer on your side, an internet connection through some provider, and finally a server in the other side. Sometimes one of this fails to work properly. You may experience a system crash, a power failure due to some storm, or your internet provider may experience technical difficulties. Moreover, your spread betting provider may have a system overload or need to shutdown servers for any damn reason. Something may go wrong and there are many reasons for that, meaning that you temporarily may lose any access to what is happening in the financial market and more importantly in your account. Running spread bets is risky. The market moves very fast and thirty seconds may be sufficient to put you in the red. Most providers will let you trade by phone, but it takes time to call them and in some situations it may result in heavy losses.

If you always set a stop loss you are protected against all technical failures that may happen. You have time to decide on what to do in an orderly way because you are protected. This is an excellent extra reason to always use stop loss orders and one good against using mental stops without setting them in the computer. Next time you trade remember it.