Trading Software: The lowdown on stop loss
In his latest article on using software to make the most out of the Exchange, Alan Thompson discusses the 'stop loss' functionality offered by a number of trading applications
"Stop Loss is the safety net for Betfair traders; it allows them to take positions knowing that should the market move against them their risk is controlled by the Stop Loss being activated."
The 'Stop Loss' function on a Betfair trading application operates in a similar way to the Tick Offset function I discussed in a recent article.
The difference this time is that you will be stopping the trade if you are in a losing position or hedging the losing amount across all the selections.
Stop loss is the safety net for Betfair traders; it allows them to take positions knowing that should the market move against them their risk is controlled by the stop loss being activated. Many applications now also allow you to control this by specifying a percentage basis rather than number of ticks.
While stop loss can be used as a standalone feature, it is often used in partnership with Tick Offset. So, where the trader would be looking for a particular movement in his favour to realise his profit, he would also set the stop loss to ensure he could close the position with an acceptable loss. In this event, whichever action is executed first it will cancel the other.
A trader enters the trade by backing at [2.0] with a Tick Offset of five, looking for a profit by laying at 1.95. But he also wants to get out of the position - his stop loss - if the market moves five ticks against him.
As he can't place a lay order at [2.1] until the market reaches that position, the stop loss instruction will place a trigger to automatically lay should the market reach that point.
Once the instruction has been executed, it is then a straight race, if the market goes against the trader and reaches [2.1] first then the stop loss trigger will be activated and trade closed for a loss. At the same time the [1.95] lay for the Tick Offset will be cancelled. Should the trader predict the market correctly and the [1.95] lay is matched then the Tick Offset trigger will be cancelled - whichever order is executed first it will cancel the other.
It is important though that traders understand the mechanics of the market they are trading if for stop loss to be truly effective.
An classic example would be an in-running football match where the market is suspended when a goal is scored or a red card is handed out. Having a stop loss active in this market may not protect the trader as expected as, when the market re-opens, that incident could send the market too far away for the request to be actioned, therefore exposing them to their full trade.
Depending on the application, there are more advanced features that can be applied to a stop loss instruction, including:
Chase: Using this feature, the application will chase the price out (past the original stop loss position if required) until it can place a successful order to close the position.
Sliding: means if the market moves in a trader's favour their stop loss request will move with the market. With a large enough market move in their favour this could see the stop loss closing position move below the original entry point, giving a profitable stop loss close.
For more on using the stop loss functionality, check out my video
For a selection of Betting Apps for Betfair.com please see the Betfair App Directory.