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Two ways to manage your risk trading a volatile stock market

by , 06 October 2015

The markets have been particularly volatile over the past couple of months.

When the market are like this, it's vital to manage your risk effectively when you're trading.

So how should you go about this?

Read on to find out…

Trading volatile stock markets

Volatile stock markets can be a trader’s dream. They bring lots of opportunities to make money. But with this comes lots of risk too and this can translate into losses.

To survive and thrive as a trader in volatile markets, you need to find trades carefully and manage your risk.

You have two main options when it comes to managing your downside risk trading

Use stop losses

Using fixed stop losses means that regardless of the ups and downs of the asset you’re trading, you won’t hit your stop unless the asset price trades through it.

This has its advantages.

For instance, it means you know your risk from the outset. But it also means the asset you’re trading could trade close to your take profit, but then take an about turn and hit your stop loss.

There is a bigger risk of this happening in volatile markets.

So you may consider the other option you have…

Use trailing stop losses

Trailing stop losses follow the price of the asset you’re trading.

For example, you put a long trade on with a trailing stop loss. If the trade starts to perform the way you want it to, the stop loss will climb higher with the price.

If the price starts to fall, it could trigger your stop loss, which would now be sitting higher than when you put the trade on.

This could mean two things:

  • Your loss isn’t as big as it could have been if you’d used a fixed stop loss; or
  • You actually lock in some profit as the price has risen enough.

This is the gamble you take with trailing stop losses. It could cut short a trade, but it limits your losses. And it can make a trade profitable that may have been a losing trade using a fixed stop loss.

Fixed stop losses or trailing stop losses?

It’s up to you which type of stop loss you’d rather use, just be sure you understand the pros and cons of each.

Using a trailing stop loss limits your potential losses more, but comes with the risk of closing you out of a trade that could go on to perform the way you forecast.

Using a fixed stop loss means you know how much you could use, but if your trade doesn’t quite hit your take profit, you won’t make any money.

So there you have it. Two ways to manage your risk trading a volatile stock market.

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Two ways to manage your risk trading a volatile stock market
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