Forex Risk Management

Whenever you invest there will be some risk. We help you manage it when you trade forex with Spread Co.

When you trade forex you’re trading on margin. So you’re using leverage to gain exposure to a potentially higher profit. This approach also means that your potential loss could be many times greater than your initial outlay. We call this an investment risk.

To help you manage this risk, there are useful risk management features included in your Spread Co account.

Some of them are free to use so it’s worthwhile using them with every position you take. Here’s how they work.

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Managing forex trading risk

Whether you trade forex using spread betting or by trading CFDs you can add in risk management features that allow you to limit your potential loss, and to lock-in your profit when it reaches a particular level.

There’s no charge for using some of these risk management features. Using them every time you open a new position — and also on positions that are already open — lets you select the level of risk you’re comfortable with.

Using stop loss orders with forex trading

A stop loss is an order. If the market price meets this order a trade is automatically executed. So, if exchange rates move in the opposite of the direction you predicted, a stop loss will give you some protection and limit your losses.

You can apply a stop loss to all positions with Spread Co.

Discover How?

Let’s imagine you went long on GBP/USD at 1.45505.

If sterling was to weaken against the US dollar you would stand to make a loss when you come to close your trade.

You can place a stop loss at any time – when you open it or at any time before you close it. This will automatically close your position at a price you have selected. For example, you might decide to set a stop loss at 1.45455 which means your potential loss is just 50 pips. So stop losses let you set a ceiling on your potential losses.

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Locking in your forex gains with limit orders

Forex trading works best when you’re able to react quickly to market developments. But sometimes you may not be able to keep a close eye on your open positions. That’s where a limit order can be very useful. Put simply, it lets you automatically close your forex positions if the market reaches a level set by you.

Example

Using the previous example, let’s say you felt confident that GBP/USD will climb from 1.45505 to 1.45605.

If the value does rise the way you anticipated, your position would be automatically closed when it reaches this level.

Of course, you would probably want to also set a stop loss to reduce potential losses.

Using stop loss and limit orders together

Using these features together with every trade can help you manage the risks associated with forex trading to avoid any market ‘gaps’. You can adjust your stop loss and limit order values to take account of changing market conditions without having to close your trades.

Forex Stop Loss Example

For example, say GBP/USD is trading at 1.45505, you set a stop loss at 1.45455 and a limit order at 1.45605.

If the value was to rise to 1.46000, you could increase your stop loss to 1.45505. So if the value falls again to 1.45505 or less your trade would close automatically.

In this case your only loss would be financing charges, assuming you held the position overnight and your stop loss achieved the value you set.

You might also decide to increase your limit order to lock in any future gains if the price rises above 1.45605.

Other risk management techniques

At Spread Co we also offer a range of risk management tools which you can apply to your positions. 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 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

Other Forex Risk Management Examples

Using the previous example, let’s say you felt confident that GBP/USD will climb from 1.45505 to 1.45605.

If the value does rise the way you anticipated, your position would be automatically closed when it reaches this level.

Of course, you would probably want to also set a stop loss to reduce potential losses.

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.

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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.

Stop loss

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.

Stop loss example

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.

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Limit 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.

Limit order example

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.

Stop and limit example

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.

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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

Spread Betting Risk ManagementInvesting in most types of assets such as company shares, precious metals or property carries some risk.

With spread betting the risk arises when the price or value of the share, index or commodity doesn’t move the way you expect. Put simply, if you bet that the price of an asset will rise and instead it falls, you’ll make a loss.

With spread betting, the amount of money you might lose — your risk capital — can be more than your outlay.
With Spread Co risk management features, like stop loss and limit orders, you can control how much risk you take.

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Managing spread betting risk

Spread betting includes features which can help you to manage your risk. These can let you put a limit on your potential loss, and also to lock-in profits when they reach a particular level. The good news is that two of the main spread betting risk management features — stop loss and limit orders — come at no extra cost. So it’s easy to use them with all of your trades.

Managing the Amount at Risk

When you place a spread bet, you probably have an idea of how much you’re prepared to risk if the market doesn’t move in the direction you anticipate.

You can manage this using a stop loss, which lets you set a price at which your trade will automatically close. This would be lower than your buy price if you’re going long, and higher than your sell price if you go short.

But with a stop loss there’s no guarantee that your trade will be closed at that price, especially in volatile markets. If the market ‘gaps’, your order will be filled at the first available price.

Spread betting stop loss example

Let’s imagine the UK100 (our benchmark index that follows the FTSE 100 index) currently sits at 5,500.

You think it will rise, so you take a long position. But to minimise your risk you set a stop loss at 5,490. If the index falls to 5,490 your trade will automatically close.

In this example your loss would be 20 (5,500 – 5,490) multiplied by your stake. With Spread Co you can apply a stop loss to any spread bet.

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Locking in profits with a limit order

If you have the time to keep a close watch on market prices and values, you might be comfortable closing your positions manually when you reach your desired profit level.

If you can’t do this, you might be better placing a limit order.

This means your trade will close automatically when your position reaches a particular price.

Spread betting limit order example

Looking at the UK100 index example again. You decide to go long so buy the index at 6,000.

You place a limit to close your position if the index rises and the lower end of our quote reaches 6,025.

If it does, then your limit will be triggered automatically. Your gain would be 25 (6,025 – 6,000) multiplied by your stake.

Using a stop loss and limit order together

You can use a combination of stops and limits on any spread bet with Spread Co.

While your position is still active, you can adjust your stop loss and limit order level at any time.

This can help you lock in higher profits, and reduce your potential losses further, when values are moving in your favour.

stop loss & limit order example

Our quote on the UK 100 is 5999.2-6,000, you decide to go long. You place a stop loss at 5,980 and a limit order at 6,025.

The index rises in value to 6,020. You could adjust your stop loss to 6,000 which would mean that you would break even if the index fell back again – assuming it didn’t ‘gap through’.

You could also adjust you limit order to 6,030, giving you potential to lock in a higher profit.