OWING Barack Obama’s attack on Wall Street towards the end of last week, the markets suffered the sort of wobble that some had thought we had seen the last of. It proved once again that we are not out of the woods yet and was a reminder that spread betters have to be able to manage risk. So what are the key points to remember?
Firstly, use stop-losses – which close your position when your losses hit a certain level, and limit orders – which take profits when they hit a certain level. Secondly, watch out for market-gapping. This is when prices literally gap from one level to the next, for example on the back of a piece of macroeconomic data. Guaranteed stop-losses can minimise your losses here.
Thirdly, know your market. Never go into a market without understanding how it moves, what affects price movements, its underlying volatility and 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 may cause downward pressure on its share price, you are fighting a losing battle.
Looking at a chart will give you an insight straight away into daily trading ranges, and support and resistance levels. Remember: knowing what can influence supply and demand or profit levels for a company may sound simplistic but this is the pure reasoning behind many stock moves.
Fourthly, develop a trading strategy. Before you enter a trade you should ideally know where you want to take profits and losses. 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 impulse trades when we see prices moving and decide to enter or close a position without really thinking it through. A clear strategy can help to prevent this.
Finally, know when to take a loss. You learn your best lessons from a losing trade and therefore a loss should not be something to fear. You should know when to take that loss, but again this is where emotion can blind you. If you watch a position going against you, you may wait in the belief that a loss will soon turn around until that loss becomes too big. 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. Safe trading.