Trading Risk Management

Behind every trader should be a solid risk management strategy. This is a quick overview of the key concepts you need to know.

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:

Market volatility

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.

Leverage

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.

Account features

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.

  1. 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).
  2. 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.

Margin calls

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:

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.

Stop loss order

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.

Next chapter Margin And Leverage

You might also be interested in...

Pricing and charges

Pricing and Charges

View spreads, margins and commissions for City Index products

Pricing
Trading platforms

Trading platforms

Take control of your trading with powerful platforms and tools

Platforms
Economic calendar

Economic calendar

View upcoming trading opportunities for the weeks ahead

Economic calendar
Test drive a trading account