Placing a CFD Trade with a Stop Order

Like all investment products, CFDs are capable of generating losses as well as profits. How you manage your risk will depend on your trading strategy, however it is highly likely that your approach to risk management will involve the use of Stop Orders.

A Stop is an order you place on a CFD trade when opening the position. A Stop is essentially an order to your CFD broker to deal at a less favourable level than the current market price. Assuming you are going long on your CFD position, either by buying the share CFD or opening a long forex position, a Stop order is in effect the level at which you wish your trade to be closed should the market go against you.

Depending on your CFD broker, there will be range of stop-loss orders at your disposal. A normal Stop Order will usually be free to apply to your trade. However, a normal Stop Order is no guarantee that you will exit the market at that level because, ultimately, it is only an order for your broker to close your position. In times of great volatility, the market can move massive amounts in a matter of seconds, meaning it may not be possible for your CFD broker or indeed, any other kind of broker, to close your position at your requested level. In this case your position would be closed at the next possible level. If this happens to you, you have been affected by what is known as ‘slippage’.

Is slippage something that you can protect yourself from? Some CFD providers will offer you guaranteed stop-losses, which mean you pay a small premium to place a stop at a level which you are guaranteed to exit the market at, slippage or no slippage.

The cost of this guaranteed stop-loss is usually borne into your position as additional spread or a small percentage of the opening position.

An example of trading a CFD with a standard Stop Order

Let’s say a large Singaporean company is expected to release positive results tomorrow. It is currently quoted by your CFD broker as trading at $11.32/11.34. You think it will rise in as a result of the report, so you buy five hundred shares at 11.34. Because you are buying these shares as a CFD, you only have to supply a deposit that is a fraction of the position’s total value. In this case, the margin rate is 10%, so you provide a deposit of $567 ($11.34 x 500 x 10%). You decide to try and limit any potential losses with a Stop Order. This is a standard Stop Order so there is no fee to pay, and you place the Stop at $11.14. This means, should the market go against you and you’re not affected by slippage, your position will be closed at 11.14, limiting your loss to $100.

However, your trade goes to plan and the company does indeed post positive results, rising to $12.05/12.07 over the following days. At this point you decide to take your profits and sell your CFD at 12.05, which gives you a return* of $355 ($12.05 – $11.34 = $0.71 x 500 = $355).

So, by using a Stop Order you managed to limit your potential losses to $100 (assuming there was no slippage) and you made a profit of $355 when the market moved in your favour. If your Stop Order had been a Guaranteed Stop, your profit would have been $337.99 ($355 – $17.01), where we assume the Guaranteed Stop premium is 0.3% on opening the CFD position.