Risk Management Key as Traders Eye Opportunities in Volatile Markets

LONDON, October 21, 2011 /PRNewswire/ --

As financial markets across the world continue to experience volatility at the hands of economic, political and natural catalysts, traders everywhere are keeping a collective eye on the opportunities afforded by the high levels of market movement.

"Spread bettors love this type of volatility," explains Joshua Raymond, Chief Market Strategist at City Index (http://www.cityindex.co.uk/). "It means there are plenty of opportunities for very short-term profit-taking if investors can correctly predict the markets. However, it does call for extremely dedicated and careful trading to avoid getting the wrong side of severe price shifts. Traders have had to be vigilant in either closing out positions for gains before the markets shift in the opposite direction, or in cutting losses before prices rally even further against their positions."

Three ways in which traders can protect their capital when trading in these conditions are stop losses, hedging and simply standing aside:

Stop losses

As the most efficient risk management tool available, a guaranteed stop loss offers a greater level of spread betting security than a standard stop loss. It guarantees to close a trade at an exact trigger value regardless of underlying market volatility and the gapping that can occur as a result.

For example, if a trader placed a spread bet of £2 per point on Wall Street at 10100 and was only willing to lose £300 on the trade, they would set up a guaranteed stop loss order at 9950. This would mean that if some bad company earnings happened to push the index past 9950 straight to 9945 (i.e. a case of market gapping), the trading platform would still close the spread bet at 9950 to protect the trader from any further losses. Guaranteed stop loss orders incur a small premium for this extra insurance to your financial spread betting.

Hedging with CFD trading

Another way traders can preserve their trading balance in the face of market volatility is to hedge with CFD trading. For instance, imagine a trader had a long position on Vodafone shares in the market and believed that the position - worth £5,000 in unrealised profit - might lose some of its value, but wanted to keep it open in the hope of a longer-term gain. With City Index, the trader could short sell the equivalent of £5,000 in Vodafone share CFDs. Should Vodafone share prices then fall by 5%, the loss in value of the actual shares trade would be offset by a near-equivalent gain in the CFD trade.

Standing aside

Remember that volatility is a necessary evil in spread betting. Without movement in the markets one cannot make a spread betting profit. There is, however, a line between a volatile market and one that is too volatile to trade. Always bear in mind that standing aside is always an option, particularly if the financial market represents too much of a spread betting risk.

Learn more about risk management in spread betting at:

http://www.cityindex.co.uk/spread-betting/how-to-manage-risk.aspx

Alternatively, try a free City Index trading seminar. Visit http://www.cityindex.co.uk/learn-to-trade/seminars.aspx for a list of upcoming dates and topics.

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, CFD trading and, in the UK, spread betting.

We constantly look to improve the performance of our platforms and expand the range of services we provide. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer service and support.

SOURCE City Index