How to Manage Risks

  • Volatility in the forex markets can bring ample opportunity to speculate and profit from forex price movements. However, there is always the possibility that your trades could go against you and this could net you a loss.

    Losses are common for most forex traders, even the best ones, and the key to becoming a successful forex trader is to manage your risk.

    As a forex trader, there are many things that you can do to increase your profit potential and reduce risks:

    • Understand the risks involved in leveraged forex trading
    • Gain knowledge of the forex markets through our seminars
    • Make a trading plan and stick to a strategy that works. See our forex trading strategies page for more information
    • Keep up-to-date with market conditions
    • Use Fundamental and Technical Analysis
    • Know when to close a trade and take a loss
    • Use trading tools such as stop orders to manage risk

    With City Index, you can use Closing Orders to keep your trading risk low and manage your positions when you cannot keep an eye on them. There are two main types of Closing Orders: Stops and Limits.

    Stop Loss Order with an existing trade

    At City Index, we offer Stop Loss Orders free of charge and across all of our forex markets.

    Stop Loss Orders are requests made by clients to close out an existing trade at a price that is worse than the current market price to help minimise losses. These are one of the most popular tools used by traders to manage risk. When the market reaches a stop level set by you, your trade will be closed automatically, cutting your losses before they can accelerate.

    For example, if you went long EUR/GBP at 0.8850 and wanted to cut your losses should the cross pair trade as low as 0.8790, you would place a Stop Loss Order at 0.8790, representing a drop of 60 pips. This means that you are limiting your risk to just 60 pips should the market go against you.

    However, Stop Loss Orders do not provide 100% guaranteed risk protection. During times of market volatility, your trade could sometimes be closed out at a level that is different to your stop level. This is called gapping or slippage, when market prices literally gap between one to the next, without ever trading at the levels in between. If the market gaps through your stop level, the closing price of the trade could differ from the stop level you have set, with the trade being closed out at the best available price after the market gap.

    Example: GBP/USD

    For example purposes, let's say you have bought GBP10,000 on GBP/USD at 1.6284, and have specified 1.6224 as your stop level, 60 pips below the current price.

    Unfortunately some bad retail sales figures in the UK push GBP/USD lower and your position is automatically closed out at 1.6224. Your loss is limited to GBP10,000 x 0.0060 (60pips) = $60.

    Please be aware that, in very rare occasions, order slippage may occur. If the market gapped down and traded below your stop level, without having ever traded at your stop level, then your trade would be filled at the next available, tradable price.

    See our Risk Disclosure Notice found in Terms and Policies.

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