Chapter 4




Peter Read, CEO and Founder of Pelican
Apr 18, 2018


Risk management



All credible trading strategies will have risk management at their heart. As we have explained earlier, the use of leverage means that traders can lose money very quickly. As a result, traders must learn to be very particular about the trades that they enter and ensure that if the trades does not work out as planned then their equity is protected and they don’t lose too much money. The principal mechanism that traders use for this purpose is the “Stop Loss”. As the name suggests, traders can enter a price at which their trades are automatically closed out if the price goes against their prediction, thereby protecting themselves from further losses. Stop losses are often determined at the time of opening the trade, when the trader enters the points from the current market price at which the stop is exercised.  These stop losses can then be adjusted should the trader wish to move them. It is reckoned that over 90% of spread-bets are opened with a stop loss attached to them. 




It is worth noting that for long trades the stop will be placed below the current market price to protect the trader from falling markets. By contrast, for short trades (i.e. the trader thinks the underlying market price will fall), the stop loss is placed above the current market price to insure against rising markets.




A limit is also an important tool for traders. In essence, it is the opposite of a stop loss. If you place a limit when you open a trade, you are stating a level where you would like to close the trade for a profit. Better traders generally would put a limit further away from their opening price than their stop. Eg if you bought a share at 100, a better trader would be expect to put a stop, say 10 points away and his or her limit 20 points above.

You can find other trading tips, many of which revolve around the vital concept of risk management later on in the Pelican academy.



 








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Spread betting and CFD trading are leveraged products and as such carry a high level of risk to your capital which can result in losses greater than your initial deposit. These products may not be suitable for all investors. CFDs are not suitable for pension building and income. Ensure you fully understand all risks involved and seek independent advice if necessary.
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