Managing Negative Positions
Once your trade is placed, the market will then start to work with you or against you. If asset prices turn in an unexpected direction, many traders start to get overly emotional and make bad decisions. This can manifest itself as either increased position size or moving the stop loss further away from the market price so that it will not get hit. But emotional reactions like this create a recipe for disaster, and quickly lead to insurmountable losses that can debilitate your spread betting account.
For these reasons, it is often a good idea to avoid making large alterations to your position if prices are working against you. This doesn’t mean that your hands are completely tied and that you should not allow yourself to adjust your trade if things turn south. But it is important to remember that there were reasons you took the trade in the first place, and the market might just need more time to work itself out before reversing. As long as you have a protective stop loss in place and a trade that was originally designed with sound risk-to-reward ratios.
Trailing Stops on Positive Positions
In profitable positions, things are a bit different. In these cases, spread betters need to monitor markets closely in order to determine the right time to close the trade. Exiting a position too soon might mean that you are sacrificing potential profits, exiting too late might mean that the market reverses and your profits disappear.
One of the best strategies for dealing with this is to start trailing your stop losses. Some traders will wait for a trade to reach a certain profit level and then trail the stop to ‘breakeven,’ which is the price at which the trade was originally taken. This prevents your winning trade from becoming a losing trade while still allowing for profits to run. Another approach to consider is to wait for your trades to reach a certain profit threshold (either in percentage or Dollar terms), take profit on half the position and bring your stop loss to breakeven on the remainder of the trade.
Trailing Stop Example
For example, let’s say you buy 20 shares of Exxon Mobil stock at 100. The market starts to work in your favor and valuations rise to 115. You want to capture some of the 15% profit but you also believe that the stock will continue to rise. You could then sell 10 shares at 115, and bring your stop loss on the remainder to 100 (your original entry point). Your account balance would then grow by $150 ($15 profit on 10 shares), and your remaining risk would be reduced to zero (as your stop loss would now be at your breakeven point).
Worst case scenario, markets would turn lower and hit your stop loss to close the remainder of your position. Best case scenario, markets would continue higher and you would be given the opportunity to close out at higher values. Either way, you would have locked in some of your profits while removing your risk on the remainder of the trade.
