Financial spreadbetting allows you to manage your exposure to risk by being able to place Limit and Stop orders, to either Open or Close positions at any time. (Indeed you can Add to or Close only part of your position should you so desire).
This is often the difficult part of trading especially when one is inexperienced and markets are volatile. You will, we are sure, experience over time an event that will test your limits of patience. For example you close a position down at a loss only to find not too long after that the position has turned profitable, or you took a profit only to find that some minutes later that profit would have doubled!
We would recommend that you define your own Entry and Exit strategies. That is, you clearly define at what level you want to Enter and Exit the market in any particular Instrument and no matter what, particularly during your first few trades, you adhere to your ‘Golden Rules.’
Let us look at a few examples at what those ‘Rules’ may be -:
It is absolutely vital to have a strict Stop Loss policy. Successful financial spreadbetters are the ones that take losses early and let profits run. Two key factors to consider are the ‘Time element’ and ‘Amount per point’. Let us explain by way of an example. In the late summer of 2002 the Dow Jones Industrial Average was climbing from a midsummer low of around 7700 and you went Long at £10 per point at 8900 and you had £10,000 in your spreadbetting Account. The Dow reached a closing High at around 9050 before retracing back to the year low, closing at 7286.2 on the 9th October 2002. To open the position you would have needed some £5000 in Margin
and by the 9th of October you would have had a ‘paper loss’ of some 1600 points and £16,000! – You would have received Margin Calls to ‘top up’ your account to cover this position. However, by the end of November 2002, the Dow had recovered and once again risen above the 8900.
As you can see from this example you need to decide what you consider is the correct time period for the trade and is your bet size congruent with your
account size. Our example above shows that unless you would have been prepared to ‘invest’ another £11,000 in your account then the account would probably have been liquidated by your spreadbetting company and your loss crystallised.
So, you now have to decide what your entry and exit levels are. Only you can set these levels – only you know what will keep you awake at night and what will enable you to sleep soundly. Try a few calculations, e.g. what would happen if something unexpected occurred – could you live with it? Is your account size large enough to handle it? Is your Stop Loss position relevant to the instrument you are trading?
A good rule of thumb would be to never lose more than say between 5% – 10% on any one trade. In our example above, therefore, you would have set a Stop Loss at 8800 on the DOW for a loss of £1000 or 10% of your account size thus leaving you with £9,000 ‘to fight another day.’ However, a 100-point stop loss on the DOW may be too narrow because in volatile markets 100- point swings on the DOW, in either direction, are commonplace. You may have to be bold sometimes and decide that you may not have enough funds to trade a particular Instrument e.g. the DOW because of its volatility. You can always trade other Instruments that do not have large swings.
Remember also, that you are able to place Guaranteed Stop Loss Orders with some financial spreadbetting companies. Some companies such as Capital Spreads insist that a stop is in place for every trade. On the Dow their recommended stop loss is 300 points away from your entry point – and they won’t accept anything less than 75.
Stop Orders are not always bad news! In our example above had you have gone Short the Dow at 8900 then the trade was extremely profitable – but at any time you could have placed a Stop Order to lock in profits. So, for example, when the market fell to 8700 you could have placed a Stop Order at 8900 i.e. your entry point, to ensure that this was a ‘no lose’ trade and then, of course, moved the Stop Order down with the market e.g. move the stop down 200 with every 200 drop in the market, thus locking in profits all the way. This is known as a Trailing Stop. Please do remember however, that there is nothing stopping the market taking your Stop Order out before continuing in the direction you anticipated. A Trailing Stop is a particular good strategy to adopt with individual share spreadbets e.g. as the share price rises/falls then place a Stop Order at say 10% away from underlying price to continue to lock in profits.
If you are moving your Stop Order at any time, please, please remember to cancel your previous instruction(s) so that you are only trading with one Stop Order.
In line with your strategy to have an Entry and Exit strategy then it is not unusual to Limit the amount of money you wish to achieve on any particular trade. A Limit Order can be placed at any time. For example if you believe any Instrument may rise or fall by a certain amount, or indeed you only wish to make a specific sum, then place limit orders to exit your position once your objective has been achieved.
If you adopt a policy of placing Limit Orders after a certain point as been achieved, be happy with your Entry and Exit strategy. It is your policy, you decided upon it – if you have made 50 points and you could have made 150 points then so be it – it is what you decided to do, you limited your risk and banked profits.
Remember to combine your strategies – if you are happy to make say 50 points on any particular Instrument, and you have no Limit Order in place and your objective has been surpassed, then place a Stop Order to Lock in 50 points of profit – any additional profit is a bonus. Of course, you can now adopt a Trailing Stop to lock in additional profits.
Again, remember to cancel any ‘old’ Limit Orders as new ones are placed.
Stop Losses are probably the most emotive subject in the world of financial spreadbetting some people trade without a Stop Loss, others trade only with a Stop Loss, some have huge Stop Orders in place whilst others have a very tight Stop Loss policy. It is up to each individual to decide what their particular policy is – and adhere to it whatever the outcome. Remember that you can always change policy if it is not working in the manner you originally anticipated