To Cut or Not to Cut? How to Manage a Losing Trade in the Financial Markets

LONDON, August 29, 2011 -

Despite the global market crashes currently colouring the markets with fear and uncertainty, gold appears to be rallying towards $2000 after a bearish period earlier in the year. With this in mind, is it wise to cut your losses, or to let them run in the hope that the market will eventually turn in your favour?

Joshua Raymond, Chief Market Strategist at spread betting provider City Index (www.cityindex.co.uk/), is in no doubt traders should protect themselves and cut their losses whenever possible. “Running a losing trade is a very dangerous tactic. From my experience, a typical feature of a bad trader is that they run their losses and cash in their profits too early.”

Spread betting expert Mr. Raymond continues: “If a market is trading against you, by running your losses you are merely escalating your net loss until some point when you feel enough is enough and close your trade for a heavy loss. Much of the decision to run a loss comes from false hope. Stick to your trading plan and get out of a trade when you believe price trends have proved your premise for entering a trade to be false. A stop loss could be a good tool to prevent your emotions from clouding your trading judgement.”

Stop losses can be an ideal risk management tool for limiting your losses, but they can also be used to lock in your profits. Joshua Raymond considers the merits of the trailing stop loss: “When the market is in a firm upward trend you should adjust your stop loss as you keep racking up profits. This way you are removing the potential to net a loss in the trade, as long as your stop is guaranteed, of course.

“There is, however, a flip side to this: in volatile markets, a stop loss can work against you. Remember, by adjusting your stop as the market moves in your favour, you are, in effect, bringing it closer to the real time market price. But you need to be aware that markets can move quickly. If you have a stop loss close to the market price and then prices take a brief surge downwards, you could be stopped out of your trade for a small gain, as opposed to netting a much larger profit should the market continue to trend in your favour.”

To learn more about risk management in spread betting, visit www.cityindex.co.uk/spread-betting/how-to-manage-risk.aspx

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. 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.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, financial spread betting.

We constantly look to improve the performance of our platforms and expand our range of services. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support. Open a spread betting account with City Index at www.cityindex.co.uk/spread-betting/start-spread-betting.aspx

Contact: Joshua Raymond, City Index, +44(0)20-7107-7002, joshua.raymond[at]cityindex.co.uk