Three ways to limit your trading losses
New to contracts for difference? Make sure you have a strategy to stop you losing money
by Donata Huggins
THE financial markets might be nervous and jumpy, but you don?t need to be if you?re thinking about learning to trade. There are plenty of ways to limit your losses. Here are our top three tips from the experts.
1. KEEP YOUR EMOTIONS IN CHECK
Jamieson Blake of Capital Spreads says: ?Emotional psychology is one of the main players in trading. If you sit in front of the screen all day you?re going to get tempted to chop and change your positions. One of the key things is to get your strategy in place and stick to it, whether that means locking your computer and hiding your mobiles, keep the original levels in place otherwise you?ll just end up making the age old mistake of running your losses and cutting your profits.?
2. UNDERSTAND THE INSTRUMENT
?It?s quite important to try and understand the instrument in the first place,? says IG Markets? Will Hedden. This means getting to know the different types of stop loss and how to use them. A stop loss is an application that throws you out of a trade when the price the trader has named is hit.
The first type is the guaranteed stop. On some trading platforms using one is mandatory. ?Once you have opened a trade, the system will allocate your stop loss order, so you can amend it to a level that you are comfortable with,? says Angus Campbell of Capital Spreads. This means that you can choose the level of risk you want to be exposed to.
If there isn?t a guaranteed stop, in his book The Naked Trader, Robbie Burns says: ?It?s generally worth paying the extra spread and getting the guarantee if you are a very new trader. Once you are confident then perhaps it isn?t worth paying the extra.?
But beware, putting the stop at an appropriate level isn?t always easy. Hedden says: ?There?s no point putting it too close on a highly volatile instrument.? Currencies, for example, can make big moves almost daily, whereas individual stocks outside major announcements tend to be steadier.
A trailing stop is also available. It moves your stop up with the market. Hedden says that you can do this manually with a regular stop loss, but warns that it is ?rather inconvenient since you have to keep editing the open position.?
3. OTHER WAYS TO TRADE
If this all sounds too risky for you, there are other ways to trade. Using a binary, for instance, can help you get used to market movements. This is a fast moving ?yes or no? bet that allows you to deal on the performance of a financial market over a specific time with only two possible outcomes. The advantage of doing this is that you know exactly what your maximum exposure will be when you start. Likewise, a custom bet ? something that allows you to bet on the next five trading minutes alone ? is thought to give new traders even more control.
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