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Trading Basics |
Managing Your Risk
In order to be a successful trader, one needs to understand how to manage risk.
Here is some important information that is vital in understanding the risk of margin trading:
- The concept of margin trading PIPTRADE offers direct access to the world’s international financial markets. A key advantage of PIPTRADE products offering is that all transactions are traded in margin (or initial deposit). This means that for a small amount of money, investors can obtain exposure to a much larger trading position hence a possibility of making a large profit with a relatively small stake.
Margin is a good faith deposit giving the investor the right to buy or sell the value of the underlying contract of an investment product.
- Leverage (also known as gearing) The idea of leverage – i.e. the use of debt to increase the expected return on your capital outlay has the distinct advantage of depositing less to gain greater exposure to a market than if you were to make a purchase in your market through a stockbroker or any other share-dealing service.
Trading in these larger volumes, in turn allows investors to take full advantage of small price movements. This application is called leveraging (or gearing) and is the key to trading these volatile markets.
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For example, a traditional share transaction on, for example 500 shares of IBM trading at US$80.00 per share, requires the full payment of US$40,000 to purchase US$40,000 worth of shares, additional commission charges are also necessary.
When you trade on margin you only put up a small portion of the underlying value. In this case, a typical requirement is 20% therefore, US$8,000 of margin is all that is required to open a Trade in the equivalent of US$40,000 worth of IBM shares.
In summary, the major difference is that the physical share trade requires payment of the full US$40,000 (plus commission) to enter the trade, whereas with margin trading you take a position of equivalent size (a trade size of US$5 per one cent (US$0.01) movement replicates the exposure of owning 500 shares) and only deposit US$8,000 .The maximum potential profit is the same with both transactions but the maximum potential loss when trading on margin is limited to $8,000 of your margin.
Now that you fully understand the risks of margin trading, you need to know how to manage these risks. PIPTRADE allows you to manage your risk on every trade you place. To do so an automatic stop loss order is attached to every trade that you take. In addition, you can use Limit Orders to take profit. You can place Stop and Limit Orders online using our trading platform, allowing you to implement your personal trading strategy efficiently.
PIPTRADE provides an execution only service and does not offer investment advice. Before placing orders, you should ensure you fully understand the risks and seek independent financial advice if necessary.
Find out more about how to use these orders to manage risk:
Stop Orders
The use of stop orders is a practical way of restricting and limiting the loss of an open position. These are commonly placed after a new position has been taken to limit loss if the market moves against the clients open position(s). If the market moves in favour of the client the stop order can be easily amended at any time so that it locks in any potential profit. However, the main point of these orders is so that the client is protected against a serious loss if there is a sudden move in the market against their position. Again, these orders can be cancelled and amended by the clients whenever they wish as long as the price has not been triggered.
For example, if you open a position by buying IBM shares at 80.00 at $5 per one tick. By placing a stop order to sell the position, if the price should fall to 64.00 the maximum potential loss is $8,000 ($5 x 1,600 points = $8,000).
PIPTRADE always ensures that a stop order is executed at the price requested and all stop orders are guaranteed, which simply means, you are always guaranteed to exit your trade at your level and never allow any slippage. Stop Orders are particularly useful for those new to margin trading.
Limit Orders Limit Orders are very similar to Stop Orders but they are used to capture potential profit rather than lose. The client places these orders if they wish to buy and sell a product at a price that is currently better than the prevailing market has to offer. The order must be placed at least the minimum distance from the current market price. The Trading Platform will note this distance clearly so you know how to place the Limit Order. When the market touches the required level the deal is automatically executed for the client. These orders are placed with the aim to get a better price than the current market. Such orders can be cancelled and amended by the clients whenever they wish as long as the price has not been triggered.
From the previous example, if you open a position by buying IBM shares at 80.00 at $5 per one tick, and place a stop order to sell the position if the price should fall to 64.00, and a limit order to sell the position if the price rises to 100.00, the Limit order now means that should the price rise to 100.00, the position will be closed, with the client taking a profit of $10,000 ($5 x 2000 points = $10,000).
In this example, the high of 105.00 has been missed but the Limit order ensured that some profits were taken when the price rose sharply.
One Cancels Other Orders
This is simply an order that has both a stop price and a limit price. If one is executed the other one is cancelled. This ensures that the client is ready for the market to move for or against them. Avoiding a large loss is the market moves against them and ensuring profit if the market moves in their favour. |
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