The Ultimate Guide to
Risk Control and Price Alert Features
CFDs (contracts for difference) are leveraged financial products, which means that trading them involves considerable risks. It is possible for a trader to lose the entire capital value in their account within moments. To this end, they must be aware of the intricacies of the market they are speculating on and should ensure that they have the correct risk appetite to handle the potential price swings.
Aside from this, a trader should also be equipped with the right technical tools to help them manage their risk better. These tools provide a trader with actionable information that allows them to react within the decision window, and execute transactions based on pre-configured values and with minimal supervision.
The trading platforms from most major brokerage houses provide users with tools built on sophisticated technologies, which help them to keep track of real time information and manage risks through prompt notifications and alerts.
What are price alerts and how do they work?
A price alert is a feature that sends alerts or notifications to the user when the price reaches a particular level. The feature allows the trader to make a timely trading decision based on the information.
An example of this is if Oil is trading at £40/barrel and the trader expects that the price will move to £60, at which price they are comfortable selling. The price alert feature allows the trader to set a notification for when the price reaches the £60/barrel. Once they receive the notification, they can immediately execute their order or carry out any other action they see fit at the time.
The reason this feature is useful is that it empowers a trader with the ability to take action just in time, without them having to constantly track and monitor market movements.
Other key risk tools offered by major brokerage platforms
Some of the key risk mitigation features that are offered by major brokerage houses include the following:
Guaranteed Stop Loss РThis feature allows the user to specify the maximum potential loss that might be incurred on their trade. If a guaranteed stop is set at a particular level and the market prices fall below that level, the trader’s position will be closed at the specified level only.
However this feature might not be available for all instruments and the user may have to pay a non-refundable spread adjustment charge to make use of it. For example, a trader buys 10 shares of Facebook at £150 and places a guaranteed stop at £130 with a spread adjustment charge of £10. If the prices fall rapidly to £100, the position will be deemed closed at £130 and losses incurred will be limited at £190 ( {150-130} x 10 – spread adjustment charge), instead of £500 ( {150-100}*10 ).
Trailing Stop – A trailing stop is designed to lock the upside of a position whilst limiting the potential downside risk. A trailing stop is used to limit the number of pips by which the prices are allowed to fall before a position is closed. For example, if a Facebook CFD is trading at 150 and a trader buys 10 units of it with a pip equaling £0.1. The trader sets a trailing stop of 10 pips. The prices go up to £160 and then fall by £1. As the fall equals the trailing stop limit of 10 pips, the position will be closed at £159. This feature prevents the user from being exposed to losses due to continuously plummeting prices. The trailing stop limit allows a trader to express their loss bearing capability in numbers. The user can adjust this limit based on their comfort level for absorbing continued losses.
ProfitLimit & Stop Loss – Profit limit is for setting a ceiling level up to which prices are allowed to move after which position will be closed and any profits would be booked. For example, shares of Facebook bought for £150 with an upward limit of £170 set. So, when the prices reach that level the positions will be closed automatically. Alternatively, if a stop loss limit of £120 is set and prices fall to £115, the position will be automatically closed.
However, the positions might not close exactly at the levels set by the user. So if the prices are falling very quickly and go from £150 to £110 in a matter of seconds, then the sale transaction may be executed more slowly than the rate at which the market is moving, and therefore at a level lower than the stop loss level. This is the key difference of this feature from a guaranteed stop, where guaranteed stop assures that the positions are closed precisely at the level set by the user in case of a fall in prices. For providing this assurance, the brokerage asks for spread adjustment charge as it will have to absorb the losses if the sale transaction executes at a level lower than the level that was set.
Entry Orders – Entry orders allow a trader to set a predefined price level at which they would like a to enter into a new transaction at. The position will be executed only if that price is reached. This price level could be above or below the current market price levels. This feature allows the user to time his entry into positions based on his perception of what they perceive a good price level to be.
Comparative Study
Below is a comparative study of the top brokerage houses with respect to the above-mentioned features:
Conclusion
An informed trader is a wise trader. The tools mentioned above not only keep the user informed, but can also act as an assistant by executing transactions based on the specified information. Trading in leveraged instruments comes with the risk of losses. These tools empower the user to minimise those losses and bring discipline into their trading practices, without having to constantly monitor market movements.
