The first question is what does risk management mean in the trading industry? This is best described as the method you would use to safeguard your trades in the financial markets.

The second question is: why is it important in trading? Risk management helps you define future objectives and minimise losses. If objectives are defined without risk consideration, sudden price moves could take you by surprise and disrupt your trading strategy.

A successful risk management strategy is fundamental to protecting your trading profits. If you keep losing money, you will eventually become discouraged and stop trading.

There are numerous techniques you can use to read price movements in the financial markets. These will go a long way in helping to ensure that you’re able to continue trading the markets.

What is leveraged trading?

Leveraged trading means you can trade using margin. This is to say that with certain forms of trading, you can open a position by depositing just a percentage of the full value of your trade.

Learning CFD trading and spread betting are two examples of leveraged financial trading. This is in contrast with more conventional forms of trading, such as share trading. In its simplest form, when you trade shares, you would have to deposit the full value of your trade to open your position.

Trading using margin or leverage can magnify your gains. The key risk of leverage, however, is that it can also magnify your losses in the exact same way.

Common types of trading

There are various forms of financial trading for you to choose from, depending on your trading strategy. These include spread betting, CFD trading and share dealing.

Spread betting

Spread betting is offered only in the UK and Ireland. It is a leveraged product that enables you to profit from fluctuations in the price of a financial asset. You can take a position on hundreds of financial instruments across numerous asset classes. These include forex, commodities, indices, as well as thousands of global shares.

With spread betting, you can speculate on rising as well as falling market prices. When you think the price of an instrument will rise, you buy. If you think it will fall, you sell.

CFD trading

Like spread betting, contracts for difference (CFD) allow you to trade the markets by depositing a small portion of the total trade value. Your profit or loss is determined by the difference between the price at which you enter and exit a trade, multiplied by the number of units you have bought.

Share trading

A stock (also known as share) market is a secondary market, where you can buy or sell shares.

When you buy a share on the stock market, you are buying it from another existing shareholder. Likewise, when you sell your shares, it is not back to the company – but to another investor.

Most forms of trading are now available online. You can trade shares, currencies, commodities, CFDs as well as spread bet online using a trading platform.

How do stop losses work?

A standard stop loss closes a losing trade after the market passes a pre-defined trigger value set by the trader. This helps you to reduce losses and safeguard against risks. This method is not always foolproof, however. During times of market volatility, your trade could be closed at a level that is worse than your trigger value. This happens because prices can sometimes jump from one level to the next, without actually passing through the level in between. This is known as ‘market gapping’.

Some traders prefer to opt for a guaranteed stop-loss order (GSLO) to protect their trades against gapping. Working in the same way as a standard stop loss, GSLOs guarantee to close your trade at the trigger value you have set. This extra security is not always available on all markets, and comes at an additional cost.  

What is a take-profit order?

This is about understanding how to exit the market when it is appropriate. A take-profit order closes your trade once it reaches a certain level of profit as defined by you. A take-profit order used in combination with a stop loss can help you to define your risk:reward ratio.

Using a risk:reward ratio

Using a risk:reward ratio can help you strengthen your trading strategy. It can compare the expected returns of an investment to the amount of risk undertaken.

To be considered useful, a risk:reward ratio should be used with a take-profit order. It should take the monetary value from each trade into account to offer a proper assessment of your portfolio.

Do Not Forget to Think About Risk Management When Trading is a post from: When Life Gives You Lemons. Did you like the post? Follow me on Twitter, like me on Facebook, or hop on over to my blog and leave me your feedback.

Risks of CFD Trading

Risk is a given, just as with any trading within financial markets. If the market makes a move against the investor, their position’s value will decline. However, this is the risk that any trader takes when they participate in any traditional form of trading. An added risk comes from the fact that a CFD is a leveraged product, which increases the chance of incurring large losses significantly.

As CFDs are traded on a margin, the investor is able to access the entire contract value for just a small percentage of the cost, however when they make a loss or a profit, these are based on the entire contract value and not only the amount that has been paid in the initial margin. The result of this is that trading CFDs may result in a loss that far exceeds the initial deposit amount. CFD trading therefore requires the investor to have a strong “game plan” on CFD trading. By accessing tools such as XTrade Europe’s Academy, you can easily learn how to manage your CFD trading strategies.

Advantages of CFD Trading on Xtrade Europe

XTrade Europe and many other professional trading platforms should offer you (through their online tutorials and tips) a solid and clear advantage on how to conduct your trades.

Trading on a margin: As trading CFDs enables the trader to hold a greater value than they actually contribute, the investor is able to earn a greater return on their investment.

No need to buy the actual stock: The trader never actually purchases the underlying asset. As CFDs are just a contract between the broker and the trader which relates to the underlying asset’s value, the trader never needs to have access to the exchange on which they are trading.

No Stamp Duty: CFDs never require the trader to purchase any shares and so therefore stamp duty is never charged on trades.

Dividends are paid: If an investor holds a long CFD position on their chosen company when the time comes for the dividend to pay out, their account is credited to the amount of the dividend. CFDs mirror the underlying asset’s value and therefore the investor holding the CFD position receives the benefit of owning the actual stock itself.

Interest is paid: If the investor holds a short position CFD, interest is paid by the broker on that money. Had the trader sold the stock rather than purchasing a short CFD, they would have been able to make a profit from interest on the sale proceeds. However as that interest is not being earned, the broker credits the investors account to the value of the interest that they would have earned.

Traders can profit in a falling market: When trading CFDs an investor is able to make money even on shares which lose their value when they make a correct prediction about the movement of the market prices. While this can also be done with other financial instruments, it is especially simple with CFDs as the client has no need to purchase the actual shares before selling them.

Guaranteed Stop Loss Function: CFD trading is risky and the investor is susceptible to making a large loss should they fail to cover their options adequately. To limit and reduce the risk, CFD brokers offer a Guaranteed Stop Loss function which offers a guarantee to the trader that should their CFD reach a given amount of loss, they will close it automatically in order to ensure that no further loss is incurred.

After Hours Trading: Many brokers permit investors to buy CFDs after market closing hours which is very beneficial to those who prefer to trade after returning home from their full time job.

Range of assets: There are plenty of different assets to choose from when trading CFDs. All of the major stocks are listed, as are foreign currencies, sectors, commodities and major indexes. This allows the trader to create a diverse portfolio of CFD investments.

No exercise date: In contrast to options, CFDs have no exercise date. While options generally have a lifespan of just one month, CFDs can last infinitely until the investor chooses to close the contract out.

Before you begin, take all of what I have written into context and remember that you can always check the viability of the CFD you are interested in, by researching online news.  When trading within the CFD markets, you can easily look back on your history, available to you from your profile. Just like traders that work through XTrade Europe, you should always keep an eye on your history to ensure safer decisions in the future.

CFD Trading Pros and Cons on Platforms Such as XTrade Europe is a post from: When Life Gives You Lemons. Did you like the post? Follow me on Twitter, like me on Facebook, or hop on over to my blog and leave me your feedback.