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If you want to place a stop-loss order on a long position, where would you place the stop-loss?
Explanation
A stop-loss automatically closes a position if the market moves against you, so on a long position it would need to be set below the current market level.
Your analysis shows that if a rising market hits a certain level, it will continue to rise. If this happens, you want to open a long trade. Which type of order would you use to speculate on a market trend like this?
Explanation
Stop-entry orders can be used to speculate on market trends. Using a stop-entry lets you enter the trade at the point your analysis confirms a trend as realised.
What’s considered the absolute maximum percentage of account capital that should be risked on a single trade?
Explanation
Bearing in mind that spread betting and CFD trading are leveraged, you should never risk more than 10% of your account equity on a single trade. Many professional traders make a rule of never risking more than 1% per trade.
What is slippage?
Explanation
Slippage is when your order is filled at a different price to the one you requested, due to a volatile market. When your order is filled at a worse level, this is called ‘negative slippage’. You can protect against negative slippage with a guaranteed stop, which will incur a small premium if triggered. You can also receive positive slippage, where your limit order is filled at a better price than you requested due to high volatility.
What kind of stop can you use to lock in profit?
Explanation
You can use any type of stop to lock in a profit – it just depends whether you want to do that manually or automatically, willing to be subject to slippage or would like to have your stop guaranteed. Trailing stops automatically ‘follow’ the market as it moves, so if the market moves in your favour the stop will move up with it. If the market then turned around, your position would be stopped out at your trailing stop’s new level – locking in any profit that you made when the market was moving in your favour. You can do this with guaranteed and normal stops, too, you’ll just need to move them closer to the market yourself.
You open a trade and set a stop 50 points away from your entry level, and a limit 200 points away. What risk-to-reward ratio are you using?
Explanation
Your limit is four times further away from your entry level than your stop, giving you a risk-to-reward ratio of 1:4.
Which type of order would you use to take some control over the profit you make?
Explanation
Limit-close orders let you specify the level at which an open trade should be closed out. If you’re long on a market then this would be above the current market level, and if you’re short, below.
If you wanted to trade with a risk to reward ratio of 1:2 and you set your stop 130 points away from your entry price, where would you set your limit?
Explanation
To get a risk to reward ratio of 1:2 you need to set your limit order twice as far away from your entry level as you set your stop order.
When is the best time to set a stop and/or a limit?
Explanation
You should have your entry and exit planned whenever you open a new trade. If you set your risk threshold as soon as you open the trade you are more likely to stick to it.
Using stops and limits can help you remove what from your trading? (Select all that apply)
Explanation
Setting stops and limits on your trades will mean you don’t need to make difficult decisions under pressure and, once they’re set, you won’t have to keep an eye on the market as your orders will manage the trade for you.
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