A plan is very important to avoid distractions and costly errors. Markets move fast, so you want to be prepared for each possible scenario you will face. Besides other variables, the entry and the exit prices are two of the most important points on your plan. Basically they define how you will enter and exit a bet.
Most of the time, beginners define when to exit a profit but forgot to define how to deal with a loss. Financial spread betting is a leveraged product, meaning you are trading on margin with just a small fraction of your total position. If something goes wrong in your trade, you will see your losses accumulating very fast. Without a strategy, you are very likely to let your bet roll until it erases all your funds or even more. But you can avoid that with the use of stop loss orders. Every time you place a buy or sell order in any market, you should also place a stop loss order. There is always a point in which you are not interested in risking any more funds and you prefer to consider the trade as being impaired. You then exit the market and keep the remaining funds for better opportunities.
To define a stop level, you can do some fundamental research on the market, use technical analysis, or apply some pre-defined rule that keeps the loss inside a certain level. You should also keep in mind that in setting the stop loss level you need to find and equilibrium between the maximum risk you want to take and the volatility of the instrument you’re trading. By one side you should not tie too much funds to a single bet but at the same time your stop should be sufficiently far away from market price to allow for normal volatility. If your stop is too near, you are going to get stopped most of the time, losing just a little in each trade, but losing almost always. Find the right equilibrium and set your stop loss.
One key rule that you should follow is that after setting a stop level, you never relax it. You can tighten a stop when you are winning but never relax it when you feel the market price is touching it. If you do so, then there is no point in setting stops and you will end losing much more than you want.
Financial spread betting is an excellent way to trade the markets but is risky and requires discipline and tight money management. The stop loss order is one of the main tools you have available. Use it. It’s a lifebuoy.
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Cut The Spread is a guide to financial markets, dedicated to shares, commodities, forex, interest rates and bonds.