Guaranteed stop definition

What is a guaranteed stop?

A guaranteed stop is a type of stop-loss that ensures your position is always closed at your pre-selected price. It is a common risk management tool, used to protect your trades from unnecessary losses during times of volatility.

It does this by removing any risk of slippage, which is when the price at which your order is executed does not match the price at which it was requested. By attaching a guaranteed stop, your broker is accepting the risk of slippage on your behalf. While many providers will charge upfront for a guaranteed stop, IG only charges you if it is triggered.

With IG, you can use guaranteed stops on spread betting or CFD positions by placing a stop on the deal ticket and ensuring you select ‘guaranteed stop’ in the drop-down.

Guaranteed stop-loss vs basic stop-loss

A basic stop-loss is an instruction to close your position once it hits a set price that is less favourable than the current market price. It can be a useful tool, but if slippage occurs then your order may not be carried out at the price you specified. Guaranteed stops work in the same way as basic stops, except that they will always be filled at the level you set, even if prices move rapidly.

What are the benefits of using a guaranteed stop?

A guaranteed stop puts an absolute cap on your potential loss. Remember, with IG they are free to place, and you’ll only get charged if the stop is triggered.

To highlight the benefits of guaranteed stops, let’s consider an example. Three traders decide to buy USD/JPY for £10 a point at 11027.5, but a flash crash causes the price to drop rapidly to 10472.7. Each trader has a different risk strategy in place that gives a different outcome to the trade.

• Trader A had no stop-loss in place and then decided to close the trade at the new lower market price. They would have lost £5548 ([11027.5 – 10472.7] x £10)
• Trader B had a basic stop-loss attached at 10840.0. Due to slippage, it was only executed at 10790.0, which means they would have lost £2375 ([11027.5 – 10790.0] x £10)
• Trader C had a guaranteed stop-loss in place at 10840.0, the position would be closed at exactly 10840.0 and the loss would be limited to £1875 ([11027.5 – 10840.0] x £10)