1. Use stop Losses
The only way to protect your trading risk is to use guaranteed
stop losses. A guaranteed stop loss is an order to close out a
position at a predetermined level specified by you. For example, if
you BUY £1 per point of UK 100 at 5000 and are only willing to lose
£200 on the trade, you could set up a guaranteed stop loss order at
4800. This means that if the market were to go against you and hit
4800, our systems will automatically close your trade at 4800 to
prevent you from incurring any further losses. There is a charge
for placing a guaranteed stop loss.
Therefore, if you are concerned about your trading risk,
particularly if you are unable to keep a check on the market when
you wish, I would strongly recommend that you consider using a
guaranteed stop loss.
2. Be aware of Market Gapping
Market gapping is a regular occurrence in the financial markets
and can significantly alter your trading risk. Market gapping
occurs when prices literally gap from one level to the next with
out trading in between. For example, if Marks and Spencer’s shares
close at 380p on Monday but re-open at 350p after announcing poor
results on Tuesday, then prices have gapped lower by 30p. To combat
this, you can use a guaranteed stop loss which will protect you and
close your trade at your desired level regardless of any market
gapping.
Market gapping can occur for many reasons such as an earnings
report of a big macro economic figure such as a Non Farm Payroll.
No one can predict when a market will gap but you can use
historical trends to help identify if it is liable to gapping in
the future. This is where charts can become really helpful to spot
gaps and underlying volatility.
3. Know your market
Understand the market you want to trade before you trade it.
Never go into a market without having a basic understanding of; how
it moves, what affects price movements, underlying volatility and
if there are any forthcoming announcements that may impact its
price. For example, if you start trading British Airways shares
without knowing that a spike in crude oil prices may result in
downward pressure on its share price, you may already be fighting a
losing battle. Understanding a market gives you the opportunity to
react quickly and correctly when news emerges. Moreover, it can
also help you to know where to place stop losses or limit
orders.
There are several ways for you to gain knowledge on a particular
market. Just looking at a chart of an instrument will give you a
typical insight straight away, such as daily trading ranges,
support and resistance levels. Knowing what elements can influence
supply and demand or profit levels for a company may sound
simplistic but this is the pure reasoning behind many stock
moves.
Using the example above, a rise in oil prices would typically
increase the costs of an airline to fly its passengers all over the
world and would therefore put pressures on earnings etc. This is
fairly easy to see if you take the time to think about it before
you place a trade.
The City Wise site itself is also a great place to gain immediate
market news, commentary, views and levels too.
4. Develop a trading strategy
Trading can be hard on your emotions and one way to combat this
and help to ensure that you get the results you want is to develop
a trading strategy for each trade you place. Before you enter a
trade you should ideally know where you want to take profits and
more importantly where you are willing to take a loss. This is
where you can use guaranteed stop losses and limit orders to help
put your strategy into practice by fixing your stop loss to your
loss target and assigning a limit order to your profit
target.
We are all prone to what is known as impulse trades when we see
prices moving and decide to enter a position without really
thinking it through. Having a trading strategy can help to prevent
this.
5. Know when to take a loss
I always say that you learn your best lessons from a losing
trade and therefore a loss should not be something to fear. What
you must be mindful of is when to take that loss and this again is
where our emotions can blind us. If you watch a position going
against you, some of us may wait and wait on the belief that a loss
will soon turnaround until that loss becomes so big that we are
forced to realise it. Knowing when to take a loss can be one of the
most important lessons in risk management you can learn and this is
also where having a trading strategy and a guaranteed stop loss can
help you immensely.