What are the risks of spread betting and CFD trading?
When spread betting and CFD trading there are two main factors to consider when assessing risk:
Events such as macro-economic data releases, central bank decisions, major earnings or geopolitical events can cause markets to move quickly and experience high levels of volatility. Whilst this volatility provides trading opportunities, it also presents risks.
Trading on leverage offers a major advantage in that from a smaller initial capital outlay you benefit from a larger market exposure. As a result, gains are magnified. However, losses are also magnified. Consequently, trading on leverage can expose you to greater potential losses than traditional forms of trading. To find out more about trading on margin click here.
There are two crucial default settings applied to your City Index trading account: Negative Balance Protection and Automated Margin Closeout.
Both settings are designed as protective measures and defined in accordance with the Financial Conduct Authority (FCA) regulations.
- Negative Balance Protection
Negative Balance Protection ensures that retail traders never lose more than the funds in their account. Should your CFD or spread betting account fall negative, we will adjust the balance to zero, at no cost to you (this does not apply to Professional Traders).
- Automated Margin Closeout
Your trading account has a pre-set margin closeout level. If the net equity on your account hits our closeout level, set at 50% of your margin requirement, our system may close all your open positions at the first available price.
Our closeout level may take precedence over pre-existing instructions.
Managing market volatility
Financial markets can react quickly and dramatically to a wide range of events – whether it’s a company earnings announcement or a general election. And while volatility can produce trading opportunities, it can also increase the chance of financial losses.
To help you stay prepared, we provide you with tools that let you track set market events:
- Economic calendar – lists the dates of major events and statements
- Company announcements – details the dates of company earnings (useful if you focus on shares)
Using stop loss orders
No trader has a 100%-win rate. That’s why it’s important that you implement risk management strategies to protect your profits, and one of the most popular tools to do this are stop loss orders.
What is a stop loss order (SLO)?
A stop loss order automatically closes a trade if the price falls below a level chosen by you.
A key benefit is that you don't need to constantly monitor your positions. You set the price level at which the stop loss is triggered, and should the market price fall below it, the trade is closed. It also prevents you from being tempted to run losses by holding onto a losing trade.
How do I add a stop loss?
Stop losses are free to add to a position.
On the deal ticket simply:
- Select the stop loss box
- Enter the stop loss price
Should you forget to add a stop loss, you can always add one once the trade has been opened.
Be aware of slippage or market gapping
It’s not always guaranteed that your stop loss will close at your chosen price. This occurs in periods of high market volatility where the price of a market can suddenly drop well below your specified level. If this occurs, the stop loss order will close the trade at the best available price.
Guaranteed stop loss orders
If you want the assurance that your trade will be closed at the prescribed level, you can use a guaranteed stop loss which comes at the cost of an increased spread.
Trailing stop losses
Trailing stop losses ‘trails’ your position by a certain number of points. It’s great for ensuring that you lock in profits if the market moves in your favour.
Things to consider when setting your stop loss
Try to strike a balance between being too close to the market price and too far
If you set it too near to the market price, your trade may be closed out by just the smallest price movements.
If you set it too far away, then it may fail to protect you from incurring larger losses.
You can set them at any time during the trade
Stop losses can be moved during an open trade in order to lock-in or break even on any profits that may have been made.
SMS Price alerts
SMS price alerts help you stay in touch with the markets without having to monitor them continuously.
A SMS notification is sent to you when your chosen market experiences a “significant price move”. Exactly what this trigger point is, will depend on each market and how volatile that market usually is (typically a price movement between 0.25% - 2%).
Following the alert, you can decide what action to take.