CFD Risk Management
All types of investing carry some risk. Our risk management features help you manage their impact.
Spread bets and CFDs (contracts for difference) are leveraged investments, so your exposure to loss is greater than the amount of your stake. This means you could lose more than you invested, if prices don’t move the way you hoped.
That’s why your Spread Co trading account includes useful features that help you manage risk by limiting potential losses or locking in any gains. There’s no charge for stop loss and limit orders, so you can use them on every position you take.
Here’s how they work.
Managing CFD risk
We want you to make the most of the opportunities that trading CFDs with Spread Co offers, but we also want you to be comfortable with the amount of risk you take. Our risk management features let you take more control by placing an upper limit on your potential loss. They can also let you automatically lock in your gains at a level chosen by you. They’re completely free, so they’re easy to use whenever you open a position.
With a stop loss, you set a price or value at which your trade will automatically close. This gives you some protection and helps you to limit your losses if the markets move against you. For example, if you decide to go long on a share valued at £1 today, you could set a stop loss at £0.98. Your position would automatically close if the share price fell to, or below, this value.
Be aware, stop loss values aren’t guaranteed. If markets are falling (or rising) sharply you might not be able to achieve the stop loss price when your trade is closed. Your position will be closed at the first available price below your stop loss.
You can apply a stop loss to all trades with Spread Co.
We’ll demonstrate how stops work in practice using a fictional company, XYZ plc.
Let’s say that our current price on XYZ plc is 1256.6 – 1257.0
You think it is set to go up in price so you take a long position. This means you “buy” at 1257.0 – the higher end of our spread. But to minimise your risk you decide to set a stop loss at 1247.0. This means that your position will be closed out automatically if the lower end of our dealing quote on XYZ plc falls to 1247.0
Let’s say that XYZ plc does fall in price and your stop is activated at 1247.0
In this example your loss would be 10 (1257 – 1247) multiplied by your stake.
With Spread Co you can apply a stop loss to any spread bet.
Guaranteed stop order
Guaranteed stop orders are available when you open a position on some markets. They work in the same way as stop loss but they guarantee that the stop loss price will be achieved, even in volatile market conditions. Unlike a stop loss, there is a small charge for a guaranteed stop order.
With a limit order you set a price or value at which you want to take profits. This gives you a guarantee that your trade will be executed at a specific price, or better. Limit orders are good for ‘locking-in’ profits, and where you’re not able to keep a close eye on market movements.
Let’s consider the XYZ plc example again. Again our dealing quote is 1256.6 – 1257.0
As before you think the stock is set to go up in price so you buy at 1257.0 – the higher end of our spread. Now it could be that you are unable to monitor the markets closely so you decide to put in a limit to close your position and take profits if the stock rises to a pre-set level. Your target is 1295.0, so this means your limit would be triggered automatically if the lower end of our dealing spread goes up to 1295.0
If it does, then your limit will be triggered automatically. Your gain would be 38 (1295 – 1257) multiplied by your stake.
Using stop loss and limit order together
A great way to use these risk management features is to use them together, that way you automatically lock in gains if the market moves in your favour, and set a limit on your losses if it moves against you. This is a great feature if you can’t always keep an eye on your open positions, or if you have a strict trading style.
You can adjust your stop loss and limit order levels at any time, while your positions are still open.
This time we’ll show you how to use a stop and a limit on a single position. Typically these are known as OCO (one cancels other) orders. This is because, once correctly set up, when one leg of the order is filled, the other order is cancelled.
Let’s take the Germany30 stock index as an example. Our quote on the Germany 30 is 10,578 – 10,580 and you decide to buy as you believe that the index is set to rise.
So you open a long position at 10,580 (the higher end of our quote) together with a stop loss at 10,550 and a limit order at 10,630.
This means that if the lower end of our quote fell to 10,550 your trade would be closed out at 10,550 (assuming the index didn’t “gap” through your stop) and your loss would be 30 points (10,580 – 10,550) multiplied by your stake. At the same time the other leg of your order (the limit) would be cancelled automatically.
But let’s say the Germany30 goes up to 10,610 without hitting your stop. You could adjust your stop loss to 10,580 which would mean that you would break even if the index fell back again – assuming once again that it didn’t “gap through.” You could also adjust you limit order to 10,650 giving you potential to lock in a higher profit.
Other risk management techniques
In addition to these features, we also offer a number of other risk management tools you can apply to your account and your trades. These include:
- One-Cancels- Other orders – when you place two simultaneous orders, one of them will be cancelled if the other is triggered
- Contingent order – lets you automatically attach a stop loss and/or a limit order if the primary order is triggered
You can also stipulate the time frame for your orders. They can be:
- Good for the Day (GFD) – where your order is automatically closed at the close of market on that day
- Good until Cancelled (GTC) – where your position remains open until you give a specific instruction to close it
- Good ‘til Time (GTT) – where your order will automatically close at a specific time on a specified day