Understanding Stop Loss and Trade Management
Effective stop loss and trade management safeguard your capital
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Before we delve any deeper, the first thing to note is that trade management is not the same thing as money management. It is important to understand this as the two can be confused quite easily.
What is trade management?
Whereas money management deals with how to allocate your spread betting funds to ensure that you risk just the right amount on each spread bet, trade management addresses how to deal with each stage of the spread bet from the moment you place the bet to the time you exit the position.
For practical financial spread betting purposes, the various elements of trade management that you should focus on include the following:
• What to do before you place the spread bet
• What to do during the spread bet as the position runs
• How to exit the spread bet
Starting from the top of the list, considering what to do before you place your spread bet is probably the most important of the three elements. Strictly speaking, all of the three areas can be summed up into the first. Indeed, many pros would argue that as a spread better, before you place a position, you should know exactly what to do during a trade irrespespective of the actual turn of events—whether you are winning or the bet is going against you. Moreover, you should also have a predefined landmark either a specified fixed percentage loss amount or a technically derived stop loss level beyond which you should be out of the trade.
For most spread betters, making the decision to enter the trade is usually easy. By the way, you can check out the section on market timing to learn effective entry strategies for profitable spread betting. However, the most difficult decisions are knowing WHEN to get out of a trade and HOW to exit a trade.
So how should you exit a spread betting position?
As you might expect, there are various ways in which to decide how to close a spread betting position. Some people use fixed profit targets so they close a bet once it has achieved a predefined level of profits. All this is well and good if you have actually called the market correctly. However, this is a flawed strategy for when you get your call wrong. Moreover, those who use this strategy are implicitly assuming that the market will do what they say. Wrong! Never make this assumption. No matter how good you think you are or how much you trust those ‘magical’ price projection numbers that you’ve been sold!
In financial spread betting as in golf, the key is to focus on your own game.
Never mind what other traders are doing. Once you have done your initial analysis and made the decision to enter into a spread betting position, the rest should be automatic. Set your stop loss parameters and make sure you have the discipline to follow through on your trading plan.
Efficient Stop Loss Strategies
As you spread bet from day to day, following these approaches would enhance your chances of profitability.
• Large spread bet size with tight stop loss: in this case, a spread better takes a large position but uses a tight stop loss so that the overall exposure is low. This works very well when combined with the use of support and resistance levels as indicators or exit points. For instance, if you are long a stock and it turns around a falls through an important support level, then you want to exit the position. This approach is most suitable for trading ranges.
• Small spread bet with wide stop: in this case, a spread better takes a small position but uses a wide stop loss so that the overall exposure is kept low. This approach is most suitable for taking new spread betting positions at the start of strong trends as you can remain in the trend long enough to maximise your spread betting profits without being taken out of the position too early.
Whatever approach you adopt, one word of warning is worth noting at this point. NEVER, move your stop level such that your potential loss is increased. If your stop loss level is hit, then exit the trade. No questions. Breaking this rule has cost many novice traders their entire spread betting capital. Please do not let this happen to you.
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