Where Should You Place Your Stop Loss?

LONDON, January 26, 2012 /PRNewswire/ --

A common misconception amongst new spread bettors and CFD traders is to place their stop loss at the levels which dictate the maximum loss they are willing to take. Here, spread betting provider City Index explains the stop loss strategies that could help you to manage your trading account more efficiently.

A well known strategy for traders is to cut losses early and run profits. Meanwhile many new traders will choose to set their stop loss at the maximum loss they are willing to take on a trade.

Professional traders tend to think slightly differently when attributing their stop loss to a certain level. More experienced traders utilise stop losses not only to cap losses, but also to close out trades when the market prices move to levels that deem the purpose for getting into the trade wrong, like when a market crashes through a Support Level.

For example, a common misconception could be to BUY £1 per point on the FTSE 100 at 5700 and, with the trader deciding that they are willing to lose no more than £300 on this spread bet or CFD trade, place their stop loss at 300 points away from their entry price, which is 5400. That means if the FTSE trades at 5400, the stop loss is triggered and their trade automatically closes. On the plus side, losses are limited to £300, but in truth, there needs to be greater considerations taken on board when deciding stop loss levels than purely ones maximum loss allowance.

To avoid these mistakes, it is important to remember why the spread betting position or CFD trade is being placed in the first place. In this instance, the trader expects the FTSE price to increase. This could be based on potential price fluctuations that may be triggered by market news, economic data or technical support.

In this example, through charting the trader can see that the FTSE typically found support at 5600 and consistently bounces back from this Support Level. This means that from a technical perspective if the FTSE trades below 5600 support, it could be set for a short term bearish move lower.

Therefore, instead of placing a stop loss at 5400, setting the stop loss level just below 5600 at 5580 would minimise losses and lock the trade out when the purpose for getting into the trade has been deemed wrong.

Charting and Support Levels are just two features of technical analysis which could help you to develop your trading strategies and enjoy more successful trades.

Learn more about trading strategies with a free City Index trading seminar at http://www.cityindex.co.uk/learn-to-trade/

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, trading CFDs and, in the UK, financial spread betting.

SOURCE City Index

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