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  • Top 5 Risk Management Tips

    Risk Management Orders

    1. Use Stop Losses

    The only way to 100% 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 5800 and are only willing to lose £200 on the trade, you could set up a guaranteed stop loss order at 5600. This means that if the UK 100 were to fall and hit 4800, our systems will automatically close your trade at 5600 to prevent you from incurring any further losses. Therefore, if you are concerned about your trading risk, particularly if you are unable to keep a check on the market when you wish, we 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 without trading at the levels in between. 

    For example, if Marks and Spencer’s shares close at 380p on Monday but re-open at 360p after announcing poor results on Tuesday, then prices have gapped lower by 20p and have not traded at the levels in between. 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 economic data figure such as the US non-farm payrolls. No one can predict when a market will gap but you can use historical trends to help identify if a particular market is liable to gapping in the future. This is where our powerful charting packages can become really helpful to spot gaps and underlying volatility. If a market is historically liable to market gapping, we recommend that you consider utilising a guaranteed stop loss.

    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
    • 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 as higher oil prices increases the airlines costs, 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.

    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. 

    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

    The best traders say that you learn your best lessons from a losing trade rather than a winning one. Therefore a loss should not be something to fear but rather be utilised to help perfect your trading in the future. What you must be mindful of is when to cut that loss and this is where our emotions can often blind us. If you watch a position going against you, some spread bettors may wait and wait on the belief that a loss will soon turn around until that loss becomes so big that they are forced to close the position. 

    Knowing when to cut 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.

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