How to Manage Risks

  • With CFD trading, you can maximise your market involvement by only having to deposit a small fraction of your total trade value whilst maintaining the same high exposure.

    This means that your gains could be magnified if the market moves in your favour. However, the main risk with leveraged trading is that your losses are magnified in exactly the same way.

    At City Index, we offer a range of tools to help you to manage your trading risks. These include Stop Loss Orders, Trailing Stops and Guaranteed Stop Loss Orders. We also offer a range of free webinars and seminars to help enhance your knowledge of CFD trading. See our Learn to Trade section for more information. We also provide a real-time Economic Calendar covering major financial events in the UK, EU and US, so you can plan your trading day around major economic events that are likely to impact the markets.

    By using the right risk management tools, you could limit potential losses without capping your profit potential.

    Standard Stop Loss Orders

    Stop losses are used to reduce risk by closing a losing trade once a market passes a trigger value set by you. This means that you are able to automatically close trades and cut your losses if the market moves against you, helping you to limit your downside potential. Standard stop losses are not infallible though, because the order will close your trade at the best available price once the stop value has been triggered.

    During times of market volatility, your trade could sometimes be closed out at a level that is different to your trigger value. This is known as market gapping. If the market does gap, your closing price could differ from the trigger value you have set.

    At City Index, we offer standard stop loss orders freely across all markets on your trading account. See the market information tab, located on the top-right corner of your trading platform window, for more information.

    Trailing Stops

    Trailing stops are a powerful risk management tool, helping you to minimise potential losses, without setting a limit on your potential gains.

    A trailing stop is created by setting a stop order that ‘trails’ your position by a specific number of points. If your trade moves in your favour, the trailing stop moves with the market, executing only when the market moves against you by the set number of points.

    A Sell trailing stop would be placed a fixed number of points below the market price. As the market price rises, the stop price rises too, ‘trailing’ the market price by the specified number of points. Should the price fall, the stop price holds, and a sell order is submitted once the stop price is hit.

    Buy trailing stop orders are the mirror image of Sell trailing stop orders, and are most appropriate for use in falling markets.

    A trailing stop is more flexible than a fixed stop loss, since it automatically tracks the market’s price direction and does not have to be manually reset, as you would have to with a standard stop loss order.

    As with standard stop loss orders, trailing stops are not guaranteed – therefore in periods of market gapping your order may not be triggered at the specified price. Instead, your order will be triggered and you trade executed at the best available price our system can deliver you – it’s important to note that this price may be worse than the level specified by you.

    Guaranteed Stop Loss Orders

    Guaranteed Stop Loss Orders are the most efficient risk management tools available. They work in the same way as Standard Stop Loss Orders, except they guarantee to close your trade at the trigger value you have set, regardless of underlying market volatility and gapping. For this added insurance, Guaranteed Stop Loss Orders incur a small premium (debited from your cash balance), upon confirmation of the order, and minimum distances apply.

    Example: Rio Tinto

    Let’s say you have bought 500 Rio Tinto CFDs at 2950p, and have highlighted 2700p as your maximum loss level, a £1250 loss allowance (2950p - 2700p x 500 CFDs). You can use a Guaranteed Stop Loss Order to ensure that should Rio Tinto reach 2700p, our systems will automatically close out your trade at this level, to prevent you from incurring any further losses.

    Unfortunately some bad copper production figures push Rio Tinto lower to 2650p, and our systems automatically close your position out at 2700p. Even though Rio Tinto's share prices continued to trade past your maximum risk allowance, the Guaranteed Stop Loss has already stopped your losses by automatically closing out your trade.

    Please note that Guaranteed Stop Loss Orders are not available across all our markets. 

    To limit your trading risk, we recommend that you consider a Guaranteed Stop Loss when you open a new position. This will help protect you if the price moves against you. See an example of how you could benefit when you use a Stop Loss Order.

    Hedging with CFDs

    As CFDs allow you to short sell and therefore profit from falling market prices, they are often used as a ‘hedging’ tool by investors as ‘insurance’ to offset losses made in their portfolios. For example, if you have a long-term portfolio you wish to keep, but feel that there is a short-term risk to the value of your investments, you could use CFDs to mitigate a short term loss by ‘hedging’ your position.

    This way, if the value of your portfolio does fall, the profit in the CFDs would help you offset these losses, thus enabling you to retain your portfolio without incurring any significant loss to its overall value. Find out more about the features of CFD trading.

    See our risk disclosure notice, found in our Terms and Policies Document.

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