SPREAD BETTING MODULE 3 RISK MANAGEMENT 1 MODULE. Spread betting. Risk Management

Transcription

1 RISK MANAGEMENT 1 MODULE 3 Spread betting Risk Management

2 RISK MANAGEMENT 2 How to use this module Navigation There are two navigation systems in this PDF. You can move forwards and backwards using the arrows at the top of the page. You can also navigate back to the contents page using the button in the header. Printing To print this document you ll need to exit the full screen mode by pressing Esc on your keyboard. This will then give you the menu bars at the top of the screen. Then proceed to print as you normally would. To return to the full interactive screen PDF press Ctrl L on your keyboard.

3 RISK MANAGEMENT 3 Contents Orders to enter the market Order types to manage your risk Visual risk management Market orders 5 Order types 12 How to use it 20 Limit orders and stop entry orders 6 Scenario: Take profit orders 13 In positions window 22 Using a limit order to enter the market 7 Scenario: Stop loss orders 15 On a chart 23 Using a stop entry order to enter the market 9 Placing a trailing stop loss 17 Viewing your stop entry and limit orders 11 Order boundaries 18 Stop loss placement Review Stop loss placement 24 Summary Test your knowledge Spread betting is a leveraged product and carries a high level of risk to your capital as prices may move rapidly against you. It is possible to lose more than your initial investment and you may be required to make further payments. These products may not be suitable for all customers therefore ensure you understand the risks and seek independent advice.

4 RISK MANAGEMENT 4 Introduction So, by now you should know how to place a trade and you should have an understanding of margin, exposure and the risks involved in spread betting. This module will help you manage these risks with the different order types we offer. MARKET ORDERS 1 LIMIT AND STOP ENTRY ORDERS 2 TAKE PROFIT ORDERS 3 STOP LOSS ORDERS 4 Successful investing requires an effective risk management strategy. With the CMC Markets spread betting account you have access to a host of order types that will help you to manage the risks associated with spread betting. 5 ORDER BOUNDARIES In this module we will explain how to use these order types to enter (using market, limit and stop entry orders) and exit the markets (using take profit and stop losses). Remember, knowing upfront how much you are willing to lose and how much you aim to make from each transaction will put you in control. You should give this part of your strategy just as much time and attention as you devote to researching what positions you want to enter. It s of critical importance that you do as much as you can to preserve your capital by making wellconsidered trades, using conservative position sizes and by managing your risk on each trade with stop loss orders. This module will teach you how to do this.

5 RISK MANAGEMENT 5 Orders to enter the market Firstly, let s take a look at placing trades to enter the market. You can either place a trade immediately at the price shown (called the Market Price), or you can program the order ticket to enter only when a selected target price is reached (referred to as a limit order) at a later date, within a certain time frame. Market orders A market order to buy or sell is an order at the current market price (i.e. the screen price). It will be executed at the first available price after the order has been accepted. Once you have placed this type of trade you will have immediately opened or closed a trade. How to place a market order Scenario: In the US, the Non-Farm Payrolls figures (which show the unemployment rate) are expected to be good when they are released on Friday. As a consequence, you believe that the US indices will rise as the outlook for the economy is positive. So you decide to buy 5 per point of the US 30 to take advantage of any appreciation in the index s price. Step 1 Search for the US 30 in the product library by typing US 30 in the search box. Click the buy price to open an order ticket. Step 2 On the order ticket, enter 5 in /pt section. Then click Confirm to place the trade.

6 RISK MANAGEMENT 6 Orders to enter the market Limit orders and stop entry orders These are the two types of orders that can be used to enter the market at a selected target price. Please see our order execution policy to the right to see how these orders are executed on our platforms. Limit and stop entry orders allow you to enter a transaction at a selected target price and within a set time period. It s a great way of setting up trades that will be opened (if your conditions are met) without you having to physically be there to watch the price and open the trade. So for example, if you had to be at work and don t have access to your trading application on your journey, you can enter the limit or stop entry orders prior to leaving home. When the markets open and if your specified price is reached then the trade will attempt to automatically execute. Limit and stop entry orders may also be extremely useful for traders who look for price breakouts they can place their trades ahead of the price movement occurring. Alternatively, if you do your research in advance and want to get set in a position once certain price criteria have been met, you can get all of your trades executed without you needing to be anywhere near the screen. Order executions policy: A limit order to buy is an order at a price below the prevailing market price. It will be executed at the first available buy price that is equal to or less than the Target Price that you have specified. A stop entry order to buy is an order at a price above the prevailing market price. It will be executed at the first available buy price that is equal to or more than the Target Price that you have specified. A limit order to sell is an order at a price above the prevailing market price. It will be executed at the first available sell price that is equal to or more than the Target Price that you have specified. A stop entry order to sell is an order at a price below the prevailing market price. It will be executed at the first available sell price that is equal to or less than the Target Price that you have specified.

7 RISK MANAGEMENT 7 Orders to enter the market Using a limit order to enter the market Sell scenario Above the current market price: With the successful launch of a new Apple iphone, Apple s share price has risen sharply over the past week. However the rest of the sector has announced mediocre results, causing a decline in share prices. You believe that an upcoming resistance level (see Module 7A for more on resistance levels) will hold and that the positive sentiment towards Apple will change and traders may take profit on Apple shares, so you decide to sell at the resistance level, to take advantage of any fall in price. However, the US markets are closed. You decide to place a limit order to open a trade once the markets open later in the day. Step 1 Search for Apple by typing Apple in the search box in the product library. From the results, click on the sell price to open an order ticket. Step 2 Enter the number of pounds per point you would like to sell in the /pt field. Then click on the Limit price to edit the price you would like to enter the market at. Order type: Sell at Limit Price. Notice the market price is greyed-out and doesn t change. Enter stake here. The order ticket will notify you when a product is closed. Enter the new entry price here.

8 RISK MANAGEMENT 8 Orders to enter the market Step 3 Step 4 Type in the price you would like to enter the trade at. In this example, we d like to enter at Then choose an expiration date for your limit order. Order type: Sell at Limit price. You have two options for the order expiration: > Open (which is the default setting) In this case your order has no expiration date and will stay open until the order price is reached and the trade executes, or you delete it from under the Orders tab in the Account section. > Valid until Order is valid until a specific date. Your order will be cancelled at the end of the day you specified if the price has not been reached. Click on the Open button to bring up a calendar. To place the order, click on the Confirm button. A confirmation screen will verify that the order was successfully placed. Enter the new entry price here. You can also set your limit preferred expiry timeframe. Have your limit orders preset to a certain percentage distance from current price each time you load up an order ticket. Remember this order hasn t executed yet and will only do so once your target price is reached. Expiration date. Use the calendar to set a date that the order will be cancelled if the limit price has not yet been reached. Here we left the Valid Until date open.

9 RISK MANAGEMENT 9 Orders to enter the market Using a stop entry order to enter the market Buy scenario Above the current market price: Brent Crude Oil has been trading in a channel range for some time and has tested the resistance level. With rumours of an oil embargo on a significant oil producing country, you believe the potential decrease in supply will drive the oil price higher. So you decide to go long (buy) 2 per point using a stop entry order to open a trade above the technical resistance level in order to take advantage of the possible spike in price. Step 1 Search for Crude Oil Brent in the search box in the product library. From the results, click on the buy price to open an order ticket Step 2 Enter your stake in the /pt field then click on the Limit/SE button. Enter your stake here.

10 RISK MANAGEMENT 10 Orders to enter the market Step 3 Step 4 Type in the price you would like to enter the trade at. In this example, we d like to enter at Then choose an expiration date for your Stop Entry Order. Either leave it as open ended, or click on Open to specify an expiry date. To place the order, click on the Confirm button. A confirmation screen will verify that the order was successfully placed. Order type: Buy stop entry. Changes automatically when you enter a new price. Enter the new price here. The order will only be executed when your target price is reached. GTC stands for Good Til Cancelled. The order will remain open until it s either filled or cancelled.

11 RISK MANAGEMENT 11 Orders to enter the market Viewing your stop entry and limit orders To view your stop entry and limit orders, or to add a stop loss or take profit at a later date, click on the Account button (in the navigation dock) and select the Orders tab. Product name. Buy or sell. Stake (pounds per point). Margin required. Add/edit Stop loss and Take profit here. Current price. TIQ TIP You can also add stop loss and take profit orders to your limit or stop entry orders at the time of placing an order, or at any time thereafter. Expiry date. Target Price. Delete the Limit order. You can cancel the stop entry or limit order at any time before the target price is reached by moving the cursor onto the order and clicking on the red x icon.

12 RISK MANAGEMENT 12 Order types to manage your risk Now you know how to place trades to enter the markets using market, limit and stop entry orders. Let s look at some order types to exit a trade. These order types will help you exit trades while you are in profit, to secure your profits, and they ll help you exit trades that go against you, before your losses become too great. These order types are: Take profit orders allow you to set a selected target profit price at which to close a trade. Stop loss orders will close out a trade at a selected target price to help limit losses. Trailing stop losses are similar to stop loss orders, but they move in the direction of favourable price movements to help lock in some of that movement if your trade goes against you at a later stage. Trade entry price. Trailing stops move with the rising market price, maintaining a 50 point distance from the high, in this example. You can specify the distance in points in the order ticket. Set at a fixed price.

13 RISK MANAGEMENT 13 Order types to manage your risk Scenario: It s just before Christmas and you have been to Marks and Spencer (MKS) to buy presents and you ve noticed that the store was very busy, even more so than on previous Christmases. So you decide to go long (buy) 1 per point at You expect the price will rise in the next few days but you are going away on holiday and might not be able to close out of the position manually. You don t want to miss out on any price rise so what can you do? You can set a take profit order at , which would lock in a profit should it occur. If Marks and Spencer does in fact reach that level then the take profit order will be activated. This will close out your existing position, realising a 40 profit. Take profit orders Step 1 After you ve selected the product you would like to trade and entered the stake size, click on Take Profit to activate that section of the order ticket. Click here to activate a take profit order. Or you can have your take profit orders preset to a certain distance from the market price each time you load up an order ticket.

14 RISK MANAGEMENT 14 Order types to manage your risk Step 2 Enter the price level at which you would like to take your profit at, or the approximate cash amount you would like to make. Did you know? When you enter a target price into the take profit field, the Amount box will automatically update to show you your potential gain in s. Likewise, if you enter a cash amount for profit, the take profit box will update to show you the price target required to achieve that amount. You can either enter a target price The take profit amount has been changed to 50, notice how the take profit price changes to or an approximate profit in cash amount, that you d like to make. If you want to place the trade with a take profit and without a stop loss, click Confirm now. TIQ TIP Take profit orders are very useful if you don t have time to sit in front of your computer all day waiting for your positions to reach a certain level before you can take your profits. To learn how to add a stop loss to the trade, proceed to the next section

15 RISK MANAGEMENT 15 Order types to manage your risk Stop loss orders You can reduce the losses caused by adverse price movements by setting stop losses on your transactions. This way you will know upfront exactly how much you are willing to lose. Note: You may lose more than your set stop loss if gapping or slippage occurs in the underlying market. Stop losses work by automatically closing your position when the product price reaches your specified stop loss price*. CMC Markets trading platform will suggest a stop loss for every trade, equal to the amount that you have invested in the position, if you have transaction based stop losses turned on. This type of stop loss can be altered, but not completely removed, during or after confirming the trade. Scenario: As in the example above, you are going long (buying) on Marks and Spencer and have already entered the take profit price. You decide to also add a stop loss to the trade to minimise your risk. You decide to risk 20 points (or 20) on this trade. Step 1 Note that this example shows how to use stop losses when transaction based stop losses are deactivated. On the order ticket, click on Stop Loss to expand this section of the order ticket. You ve already entered your stake in pounds per point and specified a take profit level. A stop loss order speaks for itself it is used to take you out of losing trades to limit your potential losses. A stop loss will be suggested that is equal to the amount of margin required to open that trade. If you have disabled the transaction based stop loss and you wish to add a stop loss, just click on Stop Loss to expand the box. *This is not guaranteed as market conditions may cause the trade to be exited at a slightly different price. Click to activate or edit a stop loss. We recommend that all new customers use transaction based stop loss orders (suggested stop loss equivalent to the margin requirement) when placing a new bet. This option is switched on by default but can be turned off in Preferences.

16 RISK MANAGEMENT 16 Order types to manage your risk Did you know? If you have transaction based stop losses turned on, you must place a stop loss order with your trade. You are free to edit this suggested level at any time, either while placing the trade or once the trade is live, but you will not be able to remove it completely. Click on the Preferences icon at the topright of your trading dashboard to turn transaction based stop losses on or off. Step 2 Enter the level at which you want your stop loss to be set. You can enter the stop loss as a target price, a cash amount or a distance in points from the entry price. You can also select whether you want to place a regular stop loss or a trailing stop loss here. (See next section). Click the Enable button to turn stop losses on or off. Notice that the price automatically adjusts when you enter an amount that you want to close out at, to show the price at which the stop loss will be triggered. Enter 20 in the Amount box (or you can click on the toggle button and enter 20 Points) to limit your loss to 20. Click to place the order.

17 RISK MANAGEMENT 17 Order types to manage your risk Placing a trailing stop loss Enter the trade details as you would for a regular stop loss but instead of choosing Regular, select Trailing. Click the toggle icon in the Stop Loss section of the order ticket, then enter 20 in the Points box. Click on Trailing to activate trailing stop loss. Red shows what is currently activated. The trailing stop loss will now maintain a distance of 20 points from the market price, as it rises. Should the price then drop and reach the trailing stop loss level, the platform will close the trade and any profits made will be locked in. The trailing stop will not move downwards on a long (buy) position. Be careful using a trailing stop loss on each trade depending on your strategy you need to allow plenty of room for the position to move. You need to allow room for reasonable fluctuations in price so you don t close your position too early. For example, if you use a longer term trend-following strategy then you need to allow for plenty of ups and downs in the market over time. If you have a tight trailing stop loss then you may get stopped out of your position without taking full advantage of the trend that may unfold. Click to place trade. TIQ TIP When the trade closes, any stop loss or take profit orders attached to that trade are automatically cancelled.

18 RISK MANAGEMENT 18 Order types to manage your risk Order boundaries A boundary allows you to specify a price range within which you would be happy for the platform to execute your order. You can add a boundary to market and stop entry orders. Sometimes, in fast moving volatile markets the price of an instrument can gap or slip. Gaps are areas on a chart where the price of the product moves sharply up or down with little trading taking place. As a result, the chart will show a gap in the normal price pattern. Gapping or slippage can occur as a result of fundamental or technical factors, including regular buying or selling pressure, earnings announcements, a change in an analyst s outlook, or any other type of news release. Gapping can occur both on the up and downside. If a market gaps through a normal order, the order would normally be filled at the first available price (which may not be the price the order was placed at). The boundary function on the trading platform is an advanced feature that allows you to specify a boundary price range on the order ticket, giving you the ability to set the amount of movement in price you are willing to accept. This feature ensures that the order is cancelled if the price at execution has moved outside the range between the screen price and your specified boundary price. To enable the boundary function on the order tickets, click here in Preferences.

19 RISK MANAGEMENT 19 Order types to manage your risk Using boundaries on a market order: For market orders you enter the boundary as a points distance from the current market price. You can even set a boundary range of zero to ensure that your order is executed at your target price. Using boundaries on a stop entry order: Remember, stop entry orders are also vulnerable to fast movements in price in volatile markets. Order boundaries allow you to manage the risk associated with movements between the price you see on the screen and the price your order is executed at, and gapping, more effectively. For stop entry orders you enter a boundary price next to the stop entry price to specify the price range that the price must fall between for the order to be executed. Insert distance in points from market price here. Enter a price level here to specify a boundary price on a stop entry order. Boundary price shown here. Current market price shown here. Scenario 1 You believe that a price of per ounce has acted as support in the past for silver and you would consider buying (going long) at or near this level. As the market is quite volatile, you decide to place a boundary on the amount of movement in price you are willing to accept in executing the trade. You stipulate a boundary of 5 points so if the price moves outside of this range upon execution of the trade your market order will not get executed and it will be cancelled. Scenario 2 You believe that a price of per ounce has acted as support in the past for silver but you feel that if the price drops below this level it will be quite bearish for the metal. You set a stop entry order to sell at however, you stipulate a boundary of 4 points so if the price falls or slips through this level and trades at the level initially then your order will not get filled.

20 RISK MANAGEMENT 20 Visual risk management You can easily set stop losses and take profit orders, relative to your entry point, before you even place a bet, using our visual risk management system. This system plots the entry, stop loss and take profit orders onto a chart of the product you re trading. How to use it Step 1 Click the factsheet button in the top-left of the order ticket to open a chart. The entry and exit orders are superimposed onto the chart as coloured lines. This allows you to view your orders, compare them to historical price levels and place your risk management orders more effectively. Once a trade is placed, you can even edit these orders directly from the charts by clicking the trade triangle at your entry point. Market price is represented by either a thin blue line for (buy) or thin orange line for (sell). If you activate a limit order a bright blue (buy) or orange (sell) dotted line appears. Move up or down using the arrows to set a preferred entry price. Stop loss is shown as a red line. Move up or down by clicking and dragging the red arrows. Take profit is shown as a green line. Move levels up or down by clicking and dragging the green arrows.

21 RISK MANAGEMENT 21 Visual risk management Step 2 Drag the lines to adjust the stop loss and take profit levels. TIQ TIP Learn about some key technical levels that can help with stop loss placement in Module 7A. The lines have been moved to be near the peaks and troughs on the chart. Notice that the take profit and stop loss prices, amount and points will automatically change to reflect the new levels as you drag them up or down.

22 RISK MANAGEMENT 22 Visual risk management Did you know? You can also adjust the stop loss and take profit orders at any time in the Positions tab in your Account window, or on the charts, after the trade has been placed: In positions window Adjust or delete stop losses and take profits here. Note: If transaction based stop losses are turned on you will not be able to delete the stop loss, only edit the level. Click on the stop loss or take profit prices to open an adjustment ticket, then change the stop loss or take profit order levels. This is how we would change the stop loss from 1, to 1, Type in 1,700.0 and click Confirm to accept the changes.

23 RISK MANAGEMENT 23 Visual risk management On a chart Edit your stop losses and take profit orders by clicking on the trade icon (the small triangular shaped point on the chart that shows your entry point) and then dragging the red and green lines. When you are happy with the new level, click Confirm to accept the change. Notice how the stop loss line was moved from 5,140.0 to 5,046.9.

24 RISK MANAGEMENT 24 Stop loss placement Stop loss placement should never be done in an arbitrary fashion. Some traders may think that placing a stop loss order as close as possible to the price is a good idea because it will limit their downside whilst allowing them to profit if the trade moves in their favour. On the surface this may sound reasonable, but the reality is very different because you need to understand that positions are very likely to spend at least some time moving against you before they move in your favour and you need to allow for this. If you are a very short term intra-day trader then your stop loss order will need to be placed closer to your entry point than someone who is looking to capture a large trending movement. You can see that the difference lies in the amount of volatility that the different traders reasonably need to be able to absorb. For instance, over the several months that a longer-term trend may take to unfold, a trader will need to absorb periods of negative market movement that are inevitable over any reasonable time period. The correct placement of stop loss orders is a specialist area that is beyond the scope of this guide. However, a possible approach to stop loss placement is to aim to place your stop at the closest point to your entry where you know your reason for being in the trade no longer exists. For instance, if you entered a position based on the breakout of a resistance level that subsequently failed, you would no longer have any reason for being in the trade. Accordingly, you would place your stop close to the resistance level so that you exit the trade as quickly as possible if it breaks down. TIQ TIP A possible approach to stop loss placement is to aim to place your stop at the closest point to your entry where you know your reason for being in the bet no longer exists.

25 RISK MANAGEMENT 25 Summary Now you should be able to: > Understand the importance of using stop loss orders > Use stop entry and limit orders to enter the market > Use stop loss, trailing stop loss and take profit orders, in the order ticket and on the charts > Adjust your stop loss and take profit orders after placing them. What should all novice traders look to do as soon as they open a new market order? If you wanted to place a trade going long (buy) on the UK 100 at a higher price than it is now, what order type could you use? Where can you monitor limit orders? Where can you monitor and adjust your stop loss and take profit orders? Click here to reveal answers

26 RISK MANAGEMENT 25 Summary Now you should be able to: > Understand the importance of using stop loss orders > Use limit orders to enter the market > Use stop loss, trailing stop loss and take profit orders, in the order ticket and on the charts > Adjust your stop loss and take profit orders after placing them. What should all novice traders look to do as soon as they open a new market order? Set a stop loss order. If you wanted to place a trade going long (buy) on the UK 100 at a higher price than it is now, what order type could you use? You would use a stop entry order. Where can you monitor limit orders? You can monitor limit orders under the Orders tab in Account. Where can you monitor and adjust your stop loss and take profit orders? You can monitor and adjust stop losses and take profit orders either on the charts or in Account. Click here to hide answers