How to Manage Risks

  • With CFD trading, you can optimise your market exposure by depositing a small fraction of your trade value as margin against your total trade value.

    This means that your gains could be multiplied if the market moves in your favour. Equally however, your losses could be magnified in exactly the same way if the market goes against you.

    At City Index, we offer a range of tools such as stop loss orders, trailing stops, guaranteed stop loss orders and limit orders to help you to better manage your CFD trading portfolio without the need to be watching your open trades constantly.

    We also offer a range of free seminars to help enhance your knowledge of CFD trading and manage your trading risk. See our Learn to Trade section for more information. By using risk management tools efficiently, you could limit potential losses without capping your profit potential.

    Standard Stop Loss Orders

    A stop loss order is used to reduce risks by closing a losing trade once a market passes a trigger value set by you. This means that you can automatically close trades and cut your losses if the market moves against you, helping you to limit your downside exposure. Standard stop losses are not infallible though, because the order will close your trade at the next 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.

    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 that they guarantee to close your trades at the trigger values 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. Please note that guaranteed orders may not be available for some illiquid markets.

    Example: Singapore Airlines

    Let’s say you have bought 500 Singapore Airlines CFDs at 10.49, and have highlighted 10.30 as your maximum loss level, a $95 loss allowance (10.49 – 10.30 - x 500 CFDs). You can use a Guaranteed Stop Loss Order to ensure that should Singapore Airlines reach 10.30, our systems will automatically close out your trade at this level, to prevent you from incurring any further losses.

    Unfortunately rising oil prices, which can inflate airline costs, depressed Singapore Airlines share price lower to 10.25, and our systems automatically closed your position out at 10.30. Even though Singapore Airline’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 and are only available during market hours. See the market information tab, located on the City Index Trading Platform, for more information.

    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.

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