Recently, many of the major commodities that are traded on the Chinese futures markets crashed and their trading was halted as they reached their maximum downward price limit for the day. On the Dalian market, coking coal fell by 9 per cent, while iron ore was down 8 per cent. Zinc was down 6.5 per cent and copper was down almost 7 per cent.
With such large falls, it is a great reminder that you should have risk management practices when you are online trading any type of asset, whether it is commodities, forex or stocks. This article will show you steps on how to manage risk with your online trading.
Planning Your Trades
Planning your trades can mean the difference between being profitable and being a failure. When it comes to planning your trades, this means setting stop loss and profit taking points. Traders who are successful use these as guides to let them know upfront what price they are willing to enter a trade at, and what price they are willing to sell at. Also, they estimate the expected return of each trade to figure out whether it is worthwhile to enter into a trade at all. Finally, they use money management to ensure they are not risking their entire trading account.
Unsuccessful traders who don’t plan their trades are like gamblers — they don’t know when to sell and when to buy, and they are relying on their luck or intuition to execute trades.
What Are Stop Loss and Profit Taking Points
A stop loss is a price that a trader sets where they will sell an asset to take a loss on a trade. This is to prevent a bad trade from becoming a larger loss, if the trader decides to hold on to the trade in the hopes that it will return back to a higher price.
A profit taking point is a price that a trader sets, where they will sell an asset in order to take a profit from a trade. It often is done to lock in profits from a trade, even though the asset may continue to rise afterwards.
How To Set Stop Loss Points
Traders often use technical analysis to set profit taking and stop loss points, however, fundamental analysis can also be used in conjunction to help with timing entry/exit points. Using moving averages is the most common way traders set buy/sell points, followed by using resistance and support trendlines.
What Is Your Expected Return On A Trade?
Traders use ‘expected return’ to determine the amount of profit or loss they anticipate from making a trade. By doing this, they are able to make an educated guess as to whether or not they should enter into a trade, or potentially skip it and look for another opportunity. They do this by comparing the expected return of different potential trades.
Money Management and How Much Money Should You Risk
Using effective money management will help you limit the downside of losing your entire trading account, while preserving the profits you make on your trades. A rule of thumb is to not risk more than 1% of your entire portfolio on any particular trade that you make. In doing so, you will avoid the risk of having your trading account wiped out by a sharp movement in prices in the wrong direction.
Use Cash To Trade Only
When online trading (or day trading) you should really only being using cash, and not loans to execute trades. In fact, the only type of loan you should use is the margin given by trading certain securities. For example, trading CFDs using a online trading platform such as CMC Markets will allow you to enter trades and leverage a margin.
Managing risks associated with online trading will prevent you from making large losses, and protect the profit you have made from your trades. You can do this by planning your trades, setting stop loss and profit taking points, working out your expected return of each trade, and managing how much money you are willing to risk.