What is trading Risk Management?
We have a favourite quote that we often refer to when it comes to risk:
‘You can measure opportunity with the same yardstick that measures the risk involved.’
- Earl Nightingale
We think there are few better ways to summarise the relationship between opportunity and risk when it comes to financial trading – the two are linked.
When you trade, the risk is that the market will move against you, but the opportunity is that you may have predicted the movement of the market correctly and you profit from opening that trade.
Have you read about leverage and margin yet? Well, these two key terms can help you to understand both risk and opportunity. For example, as you’ll be trading on leverage, there’s the opportunity to access markets that you might not have been able to before. The more markets you have access you, the more opportunity.
Trading risk management is working out the potential profit or loss of a trade – it’s an essential part of any trader’s strategy. Risk management will be unique to your wants and needs, and you need to consider your goals and standards, ideally before placing a trade.
The most important thing about risk is that you need to be aware of it and know the tools that you can use to balance risk and opportunity effectively.
Luckily, there are a variety of tools available to help you manage the risk of opening a trade. One of these tools is called the Guaranteed Stop Loss Order.
What is a Guaranteed Stop Loss Order?
A Guaranteed Stop Loss Order (GSLO) is a tool that you can use on your trading platform to limit losses within a trade. By using this tool, you can set a price at which you want to exit the trade – it’s especially useful if you don’t have time to monitor your trade constantly, as the GSLO will remove you from the trade the moment the set price is reached.
Traders can decide to set their GSLO either by percentage or by points:
- Percentage – Let’s say that you didn’t want the price to fluctuate by 6% against your trade. You would set a GSLO at a limit of 5% to prevent any possible losses
- By points – You open a Buy Apple Share trade at 187.76, but you want to protect yourself if the market moves against you, so you enter a GSLO of 187.60 to minimise possible losses
On the XX platform, you can set up a GSLO by pressing the ‘Order’ button next to the market you’re interested in.
The following pop-up will appear – you can enter the Stop Loss limit in the box highlighted.
You will be charged for activating the Guaranteed Stop Loss Order as soon as you use it. There are also restrictions on how close you may place a GSLO. For example, in the Wall Street 30 it must be at least 1% of the market price away from the current price.
Other risk management tools
As well as Guaranteed Stop Loss Orders, we also offer other forms of risk management tools. These are ready to use on your platform and will help balance opportunity with possible risks.
Stops are an order or instruction to the broker to either buy or sell as a specific price level. You can place either a Buy or Sell Stop:
- Buy Stop – an order or instruction to buy at a price level above the current market price
- Sell Stop – an order or instruction to sell at a price level below the current market price
There is also another Stop Order, known as a Trailing Stop Order. This can be applied to both Buy or Sell Stop Orders attached to an open position:
- Trailing Stop – this form of Stop Order is different because it automatically adjusts the Stop price level if the market begins to move in the way the trader speculated. For every point the market moves in the trader’s favour, the Stop price level will adjust by 1 point.
Limits are a little different from Stops. It’s important to know the difference so that you use the correct tool when trading:
- Buy Limit – an order or instruction to buy at a price level below the current market price
- Sell Limit – an order or instruction to sell at a price level above the current market price
More on risk management
Trading is a very psychological hobby. To help you understand more about risk and the psychology of trading, we’ve put together some need-to-know information about what to look out for when you’re trading.
There are other ways to manage your risk too – would you like to know more?