A: Nobody, but nobody has a 100 percent success rate which is why you need the discipline to cut losses early. A Stop Loss Order is a safety net which limits your losses should the market move against you. When placing a spread bet you are taking a risk that you won't correctly predict the market direction - for instance if you go LONG the market can still go UP or DOWN and if the market goes down this will translate in a loss on your spread bet position. Now, trying to rely on hope is futile - you need to ensure that you have an emergency exit should things not go to plan and this exit is the Stop Loss Order. Learning to accept many small losses allows you to protect your capital for the winning positions, but this is only possible if you have a trading plan.
There are two types of stop orders - normal stop orders which are offered by the providers free of charge and guaranteed stop loss orders (aka as controlled risk bets) where you are charged a little bit extra in the form of a wider bid-offer spread but the stop loss level is guaranteed. Although the spread betting company will try to close your bet at your stop order on a best execution basis, in some cases you may still be closed out at a price higher or lower than your stop. This is because in fast moving markets shares, indices or commodities can gap meaning that the price moves to quickly. With guaranteed stop loss order gapping doesn't happen, the provider 'guarantees' the level at which you will be stopped out and this is why you are charged a premium for it.
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Most providers will insist that you place a stop loss order with your trade to protect both you and them. This is usually placed automatically on trades opened (which is why it is sometimes referred to as a computer generated stop), however you can adjust this stop loss order level anytime. Note also that markets have a minimum distance from the current price where stops will be accepted. You can, of course move the stop further away from the prevailing market price provided your account has sufficient margin. Note also that some companies like Capital Spreads will automatically cancel your stop loss order when the position is closed but some other companies treat them as separate orders and will require you to actually instruct that the stop loss be cancelled. We discuss the different type of stop losses and their uses in this section
A: Most traders simply pick a number out of thin air or choose the same amount on every trade they place but this is a blunder. Trading the same amount on every trade means that the absolute risk on each trade will fluctuate wildly. Your stake on any one trade should be determined by your account size, the perceived risk and the proportion of your account you are ready to risk.
I found this simple formula useful to control risks. I recommend that your daily profit target is no more than 2% of your capital, your initial risk on a trade is no more than 4% of capital and your stake size is 2% of your capital. For example, if your capital is £10,000, then your initial stake size is £20 per point, your risk is £400 (maximum stop loss is 20 points) and your daily target is £200. Clearly, if you were to start with a higher capital balance you can increase your stake size based upon a similar calculation. You should risk no more than 4% on each trade as I believe a cautious approach is best and will give you the leeway and cushion to weather the inevitable losing trades.
When the trade has moved 10 points in your favour I move the stop loss level to lock in your profits.
Usually if the trade is going to achieve a 20 point profit it does so reasonably quickly. Your first trade is generated usually within the first hour of trading. So a successful trade (i.e. 20 point profit) is completed by say 11am. In such circumstances you will earn 3% on your capital. The following example illustrates:
BUY £20 @ MARKET PRICE (4500) & PLACE STOP TO SELL £20 @ 4480 8:24AM.
MOVE STOP TO SELL £20 FROM 4480 to 4510.
LONG TRADE CLOSED @ 4520. PROFIT TARGET ACHIEVED. CANCEL STOP.
The profits earned would be £20 X 20 = £400. This is 4% of your capital. Remember our target is 2% overall, so you will need some days above average earnings to compensate for days when you lose in order to average 2%.
A: Perception and risk mean different things to different people. For instance someone who earns £1 million a year will not think much of losing £1500 but for the person who earns £15,000 a year, losing £1500 could be seen as catastrophic. The key is to consider money as simply a tool to make you more money and for this reason we must detach our emotions from money. This is where risk management and stop loss orders come into play.
Risk management is critical to succeeding in spread betting. Risk management is the part of trading that dictates how much of your capital per trade you will risk and in general this shouldn't exceed 2% of your pot.
Assuming you have chosen a trade and have already determined your entry and stop loss level you can work out the price per point as follows:
Suppose you have a £10,000 trading account, setting the risk level at 2% would amount to a risk amount per trade of £200.
If you buy a spread bet (go long) at 240 with the stop loss at 200 this equates to a 40 point difference. So dividing the risk amount (£200) by 40 returns the amount you should be per point (£5) to maintain this risk level.
Position Size = Account Risk / Trade Risk.
Position Size = (1% x account value) / (entry price - stop loss).
It is crucial that you do not change the risk level during open trades - risk management will instantly give you an advantage over the majority of beginners who just randomly pick amounts to trade, it will protect your pot and keep you in the game longer.
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A: To simplify this let's consider forex. In forex trading, if you are using 1:1 gearing, and your trade moves 3%, your account goes up or down 3%. With 5:1 leverage, when the trade moves 3%, your account changes 15% With 10:1 leverage, your account will change 30%. The same is true for margin trades in spread betting/cfds.
In general how this effects traders is the emotional reaction a trader has because such a large percentage of their account is on the line with greed and fear being the usual reactions.
How this applies to the technical aspect of the trade is that to follow proper money management, you will be forced to really tighten your stops. Higher leverage basically means a larger position size. To keep a maximum loss of 2%, you would need a really tight stop.
However, it is important to make sure that you are not placing a stop loss just because that point is where you are not willing to lose more money. You need to make sure you are looking for a support level, then determining the amount of money you are willing to risk or lose if you make it to that level, then set your share size accordingly. Make sure you don't just pick a spot and say 'well here I will be losing $100 so I need to make that my stop loss'.
At the end remember leverage is not what spread betting providers will allow you to use, it is what you decide to use.
Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com or by filling in the form below :-)
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