CFD Trading Guide to Limiting Losses When Trading Volatile Markets

SYDNEY, March 23, 2012 /PRNewswire/ --

CFD trading allows you to trade on margin, using a fraction of your trading capital. This allows you to access a wide range of global markets - including shares, indices, currencies and commodities - using a small portion of what is usually required to trade the underlying market.

A solid strategy is imperative to your trading success. Market analysis and risk management can be the foundations on which everything else is built; with both playing a vital role in your success.

Risk management tools, available through the City Index Australia trading platform, helps you to limit losses and maximize your profit potential.

These tools are of particular importance when trading volatile markets which are prone to market gapping and slippage.

With this in mind, below you will find an easy-to-follow guide as to what happens when a market gaps and prices encounter slippage, as well as what you can do to limit your losses at such a time.

Market Gapping and Slippage

Market gapping occurs when prices, quite literally, 'gap' between one price to the next and without ever trading at the prices in between.

Traders have the choice of using various 'Stop Orders' to help protect themselves when trading the markets to help mitigate against the risk of slippage or market gapping.

Standard Stop Loss Order

A Standard Stop Loss Order is set at a specified priced which, when reached, automatically triggers an order to close your position. However, this form of Stop Loss Order does not fully protect your trading risk.

This is because the closing trade is executed at the next available price after the order is triggered.

In the case of market gapping and slippage, the execution price could be the same or it could also be worse than the specified execution level if the market gaps past your order level.

In cases of severe market gapping and slippage, the execution price may be at a substantially worse than your order price, resulting in greater losses.

Guaranteed Stop Loss Order(GSLO)

Using a Guaranteed Stop Loss Order is the most effective form of managing risk and limiting losses.

GSLOs are not available on all markets and there is a small premium charged for the added protection.

Summary

Using a CFD trading account to trade a volatile market can prove risky. You can use risk management tools as part of a trading strategy to help limit your potential losses if market gapping and slippage occurs.

Trading CFDs on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment as you may not have an interest in the underlying asset. You must 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.

City Index is a leading global provider of margined foreign exchange and CFD trading. As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. To learn more visit: http://www.cityindex.com.au/