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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
What's the best way to ensure a position will be closed at exactly the level where you want to exit, if you make a loss?
Explanation
A stop is a resting order that will close your position if the market hits the level you specify. Using a guaranteed stop means you won't experience any slippage beyond that price.
What are the benefits of setting a stop? (Select all that apply)
Explanation
A stop automates the process of closing a trade if the market moves against you. So you can choose your exit point, then leave it to your platform to execute the decision you've made.
When is the best time to set a stop?
Explanation
Ideally you should set your stop at the outset, so your position is never left unprotected. You can move stops later if necessary.
What is a risk vs reward ratio?
Explanation
A risk vs reward ratio compares the amount you risk losing on a trade with the amount of profit you could possibly make.
Which of these techniques would you expect a professional trader to use to maximise their chances of profitability? (Select all that apply)
Explanation
It's impossible for humans to predict the future, so rather than focusing on winning more trades, professional traders tend to concentrate on reducing the impact of loss. Adopting a positive risk vs reward ratio means that the capital a trader risks is worthwhile in terms of the potential profit.
If you trade with a 1:2 risk vs reward ratio, which of the following would enable you to be profitable? (Select all that apply)
Explanation
It's possible to be profitable even if you're wrong 60% of the time, when you use a 1:2 risk vs reward ratio. Remembering our example of a coin game, if you flipped ten times, you'd lose £6 from your six failures, but make £8 from your four successes.
You set a stop 100 pips away from your entry level on a trade, and a limit 400 pips away. What risk vs reward ratio are you using?
Explanation
Your risk is 100 pips and your potential profit is 400 pips, giving you a 1:4 risk vs reward ratio.
Trading with a 1:2 risk vs reward ratio means you can never wipe out your trading capital:
Explanation
You always need to consider the amount of trading capital you could lose on any one trade, even if you're using the recommended 1:2 risk vs reward ratio. A single bad trade can be enough to erase your account balance if you take on too much risk.
What percentage of your trading capital would be sensible to risk on any one position?
Explanation
For new traders, it's wise to risk no more than 1% of your trading capital per position. This will leave 99% of your account equity intact if the trade doesn't work out. More experienced traders could consider risking up to 5%, but remember that markets are by nature unpredictable and any trade can go wrong.
Which one of our five rules is most important to follow on each and every trade?
Explanation
Following all of these rules, all of the time, will enable you to focus on the important part of trading - watching the markets and finding the right opportunities to make rewarding and sustainable profits.
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