Investment Risks

8/4/2019 Investment Risks

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Trading Guide 1

Eective Risk

Management


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Contents

Introduction

Risk Warning

Insufcient Risk Management

Understanding Risk

Risk Management

the Lieblood o any Trader

Position sizing

Two percent rule

Support resistance

Exit strategy

Step 1 Stop Loss

Step 2 - Take Proft

Breakout strategy

Calculating Margin

How to calculate your total exposure

Control your leverage

3

4

5

6

7

8

9

11

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2CMC MARKETSEective Risk Management


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Intro

du

ction

Before you start it is important to ensure that you are aware of the risks

associated with spread betting. Please take a minute to view the risk warning

and disclaimer below before proceeding.

Risk Warning

Spread Betting is a leveraged product and carries a high level of risk to

your capital and it is possible to lose more than your initial investment. Only

speculate with money you can afford to lose.

These products may not be suitable for all investors, therefore you must fully

understand the risks involved, and seek independent advice if necessary.

CMC Spreadbet Plc is authorised and regulated by the Financial Services

Authority.

Please remember CMC Markets provides an execution-only service.

This material is for general information only and is not intended to provide

trading or investment advice or any personal recommendations.



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A common mistake that people often make is that they dont apply Strategy,

Methodology and Record Keeping to their trades. Too many people enter

trades without adequately thinking of what they want to achieve out of that

position.By minimising risk, you can prevent a substantial loss, ultimately affecting the

preservation of your trading capital.

Within this PDF, we will go through how and when to place a stop loss and how

much risk you should be placing on your trades. We will also discuss another

common mistake that people make which is over leverage.

Insuf

cien

t

riskma

nage

men

t

Having a trading plan, a trading journal and a risk

management plan helps to stabilise your trading

decisions with a logic that can be recorded,

assessed and continually improved on. Craig Inglis

Trader Tip:



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Regardless of market conditions, you still need to take a very active approach

to the way you manage the risks associated with trading.

Its a fact of life that even the most gifted traders have to face the possibility

of making a loss. Its important for all traders to be realistic and put a riskmanagement strategy in place at the earliest opportunity.

Whilst picking the right product is important, no trader gets it right 100% of the

time so it is the preservation of capital that is the most valuable lesson to

learn.

When people rst start trading they enter trades for the excitement value

and the prospect of making a nice return on their money. However, many

new traders ignore the inherent risks and how to manage these risks. Some

products are particularly volatile and this is where the requirement for good

risk management becomes even more important.

Und

ersta

ndin

gris

k

Example of a highly volatile product chart

Too much focus on the upside, with little

regard for an exit strategy on the downside

means you dont know when to exit and

preserve your capital. Michael Hewson

Trader Tip:



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The Lieblood oany Trader

If you dont know where your stop

will go then how many pounds per

point should you trade?

Most position sizing methods

require you to know the answer

to both without knowing this

you cant apply consistent risk

management to your positions.

Learn to be mechanical in your

approach to placing stop losses

and ensure you place them on every

trade you perform. By not having

a mechanical approach to stop

losses, it will allow your heart to take

over. The want for a product price

to turn around and be protable

leads to bigger and bigger losses in

downward markets, making it harderto get out of the trade.

This can lead to being in a trade far

longer than you should be, or want

to be. This is also an ineffective use

of your capital.

Our next generation

spread betting platform

lets you place your

stop loss based on the

approximate amount

of money that you areprepared to lose or based

on a target price. You can

also set a default stop

loss based on margin

requirement.

Note:

Riskma

nage

men

t The other advantage of stop lossesis that they allow you to easilydetermine how much capital to place

on each trade - this is known as riskto reward.

There are numerous different

strategies that you can use to

place more effective stop losses,

giving you a greater chance of a

successful trade, without having to

risk a disproportionate amount on

one trade.



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Risk Management comes down to both where we place our stops and how

much we place on each individual trade, and this is known as position sizing.

There are several position sizing models available and they determine yourrisk based on either a xed pound amount or a xed percentage.

One of the most popular methods is to risk only 2% of your trading capital

on any one trade. Not only does this mean you are risking a very small

amount per trade, relative to your trading account, but it allows you to place

5 or 6 trades and never have more than 10-15% of your trading capital at

risk at any one time.

Two percent rule

Risking no more than 2% of your total capital per trade is a standard

starting point when setting up your risk management plan.

Many professional traders believe even this is too much

- youll need to decide what is right for you.

2% per trade risk formula

Account size x 2% = risk amount per trade

10,000 x 2% = 200 amount per trade

Your system would need to produce more winners than losers.

You would need 60% winners. This has nothing to do with leverage,

as you can use leverage and still stay within 2% equity of your account.

The 80/20 ruleThe Pareto principle is also called the 80/20 rule. This states that 80% of

your prot will come from 20% of your trades, but that you need to protect

your capital so that you can take advantage of these opportunities when

they arise.

Po

sitio

n

sizin

g



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Su

pport

resis

tanc

eThe concept of support and resistance is central to helping us

understand market price movements when studying charts. In order

to ascertain trends (the basis of Technical Analysis) we need to identify

key highs and lows in price.

A resistance level is an area higher than the current market price where the

selling is strong enough to overcome the buying pressure creating a peak or

high. A support level is the opposite of resistance and is an area lower than

the current market price where the buying is strong enough to overcome the

selling pressure creating a trough of low.

On the above chart we have placed a Support level (yellow line) at the key

signicant market lows. As the market approaches this level we have two

main options.

A) History will repeat itself and price will start to rise.

B) We think that fundamental news will override the support level and price

will break through this level and head lower.

For this example lets say we believe that history will repeat itself (A), and we

will base our trading decision on this. We therefore place an order to buy just

above the support level (blue triangle).

Please note: our charts and charting tools are provided solely for

information purposes and must not be relied upon as trading or investment

advice or a personal recommendation.



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Ex

itstr

ateg

y Step 1 Stop LossAs the most important risk

management tool availableto clients, it is important to limit

your risk by placing a stop loss.

CMC Markets suggest one for

you (only available on our next

generation platform) when you

rst place a trade at the margin

requirement for the trade, this can

be altered to a new level if desired. In

this scenario we will place the stop

loss (red line) just below the supportlevel (yellow line) as we believe that if

the price breaks through this level it

will continue to go down and we want

to limit any potential losses.

Another option is to place a trailing

stop* at this level, this new order

type will still offer protection against

the markets moving against you,

but will also rise if the market movesin your favour, effectively locking in

some of that movement.

Step 2 Take Proft

In many cases it is just as important

to set a clear dened take protlevel. You can use support and

resistance levels to help you

determine where that price might be.

In this example we have also placed

a resistance level on the chart and

as we now know this could be an

area where sellers enter the market.

Therefore we want to place a Take

Prot Order (green line) to close out

this trade just below this Resistancelevel to lock in our prot.

* Trailing Stops are only available on our next generation platform.



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Breakout Strategy

For those of you more familiar in the

eld of technical analysis, you canalso have buy signals when the price

breaks out of a resistance level. You

can enter a buy trade just above

this price (blue triangle), we do this

as we are waiting for conrmation

of change in trend, and a signicant

break is enough conrmation.

Taking on board what we have just

learnt, we look for possible supportareas that could provide us with the

perfect place to position our stop

loss. Remember, our next generation

deal ticket will show you how much

(in points or value) you stand to lose

if the price is stopped out.

If you class yourself as risk averse

or you lack the condence in the

upside movement, you could place

your stop just above the rst

support level.

If you regard this price as too close

you could decide to place your stop

loss at the second support level,

though you are now risking more.

Options here are to lower your total

stake size to cater for the bigger

stop loss position. Therefore we are

risking the same amount on both.



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How to calculate yourtotal exposure

Multiply the product price by your

chosen bet size.

For example, if the share price of a

stock is 99.00/100.00 and you wish

to go long (buy) at 10 per point,

what would your exposure be?

100.00 x 10 = 1000 exposure.

Total: 5% margin (Stock ABC)

1000 x 5% = 50

C

alcu

latin

g

m

arg

inWhat are Close-Out levels?

Close-Out levels (or liquidation

levels as theyre referred to on

our Marketmaker platform) arelevels on your account that will

cause your existing positions to be

automatically reduced or closed

out. These levels are to provide our

clients with extra protection against

adverse price movements.

It is important to make sure

you keep an active eye on your

account at all times to ensure youraccount is in order. If further market

movements occur and you are

signicantly overtrading,

CMC Markets reserves the right to

close out (liquidate) your position(s)

without warning to try and protect

you from further losses.

Wed like to remind you that

you should not rely on our rightto liquidate your position to

protect you from going into decit.

Therefore you should consider

using Stop Loss orders to manage

your risk.



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You should consider placing

a threshold on the maximum

leverage that you apply to your

capital. In order to remain relatively

conservative a limit of 3x leverage

may be appropriate.

This would mean that if you had

10,000 in your account then you

wouldnt take on more than 30,000

worth of market exposure.

Contro

lyou

r

lev

erag

e

Your stop losses are very important but if there

is a sudden move in the market, a conservative

amount of market exposure can be of even

greater importance to you.Ashraf Laidi

Trader Tip:

We learnt earlier

(Insufcient RiskManagement) about

placing stop losses at

previous signicant

price levels. These support

areas limit our losses in

price, though if our market

exposure is large the losscan still be quite signicant.

For example a stop loss

at 25 pence equates to a

loss of 2,500 when the

exposure is 10,000. If

the exposure was 5,000

the stop loss of 25 pencewould lead to only a

1,250 loss.

Note



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CMC Spreadbet plc

133 Houndsditch

London EC3A 7BX

United Kingdom

Freephone 0800 0933 633

Tel +44 (0)20 7170 8200Fax +44 (0)20 7170 8498Email [email protected] www.cmcmarkets.co.uk

Registered Number 02589529

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Investment Risks