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.
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.
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.
Guaranteed stop orders
Stop losses aren’t guaranteed and when markets are particularly volatile you could find that your position isn’t closed at exactly the price you placed your stop order. For example, when prices are changing rapidly there can be market ‘gaps’. When this happens, your order will be filled at the first available price.
If you need certainty, you may be better off with a guaranteed stop order. This works in the same way as stop loss but the value at which your position is closed is guaranteed. There’s also a small charge for a guaranteed stop order while you can apply a stop loss at no cost.
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.
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 – especially if you apply a guaranteed stop loss 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.
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
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.
