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Risk management is a core principle that every trader should take seriously–especially in the current financial climate. With markets around the world reacting to Trump’s barrage of trade tariffs, the heightened volatility makes it increasingly challenging for traders to mitigate risk.
While things remain wholly uncertain, traders can still exercise some control over the current market uncertainty with the proper application of risk management tools.
In this article, we will share 10 risk management tools and how traders can use them to their advantage.
1. Use stop-loss orders to limit risk
Stop-loss orders are automated trading instructions that tell a broker to sell (or buy) a security or asset when the price reaches a certain level. This prevents the position from taking on further losses.
Once triggered, the broker will execute the trade at the best available market price. There are two types of stop-loss orders available:
- Sell-stop orders are used to protect a long position by selling the asset when the price falls under the trigger price.
- Buy-stop orders are used to protect a short position by instructing the broker to buy the asset when trigger price is reached or exceeded.
Stop-loss orders are a widely used tool to help traders manage risk and limit potential losses, but do note that they are not always foolproof.
To illustrate, during extreme market volatility, assets might exceed the trigger price far before the stop-loss order can be executed. Furthermore, stop-loss orders could be triggered by temporary volatility, even if the overall trend is positive. As such, setting stop-loss orders that are too thin may cause a trade to close prematurely.
2. Protect your account with negative balance protection
Negative Balance Protection is a feature offered by many regulated brokers, including Vantage. Simply put, it ensures that a trader’s losses cannot exceed the amount they have deposited.
Should a trade cause a trader’s account to result in a negative balance, the broker automatically closes the trade and absorbs the losses. This leaves the trader’s balance at $0.
For example, if you open a leveraged position with a deposit of $100, but your position goes into a loss of $120, your balance would be at -$20. That means you would need to top up an additional $20 to reopen your account.
In this way, traders can avoid incurring debt to the broker due to trading losses.
However, with Vantage’s Negative Account Protection, your balance is reset to $0, with any credits in your account deducted to offset the difference. This helps ensure losses are limited to your deposited funds, which can assist with risk management though it does not eliminate the risks of trading during volatile markets.
Learn more about how Negative Balance Protection works and how it can help you manage risk more effectively.
3. Choose the right trade types
When managing risk, traders should take care to choose the right trade type. Choosing wrongly will only exacerbate the situation and potentially worsen losses.
Case in point: Know the difference between buy-stop orders and sell-stop orders. If you’re taking a long position, you should be using a sell-stop to protect against losses. But if you accidentally choose a buy-stop order instead, you are making a completely different trade that will not produce the expected results.
Maintaining a calm and disciplined approach when trading will go a long way in avoiding such mistakes.
4. Manage downturns by shorting the markets
Many investors tend to panic when the markets are falling. It is understandably frustrating to see your position plunging day after day.
But selling your holdings during a market downturn could force you to accept unfavourable prices—and worse, lock you out of future gains when the market inevitably rights itself.
Some traders may consider short-selling as a way to hedge against downside risk. This simply means opening a short position to “borrow” shares from your broker. When the price drops further, you can sell the shares and close your position, returning the shares to your broker and potentially profiting from the difference though losses can also increase significantly if the price rises instead.
It’s actually simpler than it sounds. Just remember: In short-selling, your position gains as the price drops, making it a useful strategy during market downturns.
Be wary, though—as the reverse also applies. If prices rise while you’re holding a short position, your losses will increase.
5. Reduce exposure through diversification
Diversification is another oft-repeated mantra for risk exposure—and for good reason. It is a widely used strategy to reduce trading risk by spreading your positions across different assets and markets.
This reduces your exposure to a single position, limiting the impact of sharp price movements in that position.
Since different assets may react differently to market changes, their prices may fluctuate to varying degrees, or even move in opposite directions. A well-diversified portfolio helps average out these price movements, improving its ability to weather severe market volatility.
6. Trade safe-haven assets in uncertain markets
Safe-haven assets are generally perceived to have a proven ability to withstand market volatility–maintaining, or even increasing, their value during downturns.
That’s because safe-haven assets are:
- Unrelated or negatively correlated with the broader market;
- Resistant to inflation or devaluation due to having limited supply;
- Able to enjoy consistent demand throughout all market conditions; and
- Likely to have permanence and cannot be easily replaced or destroyed
Popular examples of safe-haven assets include gold, defensive stocks, AAA-rated bonds, and selected currencies.
To ride out the current market uncertainty and protect their holdings from risk, traders and investors can consider shifting toward safe-haven assets.
7. Apply dollar-cost averaging (DCA) for volatility control
Market downturns may be frightening, but this also means assets are now available at a discount. This presents attractive opportunities for savvy investors to load up on their preferred stocks and assets.
However, it is impossible to predict when the market will bottom out (i.e., stop falling and begin an uptrend again), which makes it difficult to know when exactly to buy into the market. After all, you don’t want to commit your funds only for the market to fall further.
The solution is Dollar-Cost Averaging (DCA), a risk management technique where a trader makes fixed-amount purchases at regular intervals. This helps average out the entry price over time, allowing you to minimise the impact of short-term market volatility, making it. best suited for long-term investing.
8. Offset losses with trade loss coupons
Some brokerages offer Trade Loss Coupons, which could be used to offset losses incurred during trading. These coupons carry a fixed value determined by your broker and are applied on closed trades, providing traders with immediate risk management and reduction of losses.
With Trade Loss Coupons, may help reduce net trading losses on closed trades. However, it’s important not to undermine this protection by taking on unnecessarily risky trades.
If available, Trade Loss Coupons are earned when fulfilling certain trading criteria or milestones. Be sure to check with your broker if they offer Trade Loss Coupons or similar perks, and whether they are available in your region, as they may not be permitted in all jurisdictions.
9. Optimise risk with smart position sizing
Choosing the right position size is one of the most important risk management techniques every trader should master.
Position size refers to the amount of capital at risk in a trade. If your position is too large, you expose your account to significant losses. If it’s too small, you may miss out on fully capitalising on a profitable opportunity.
This becomes even more crucial when trading with leverage, such as in CFDs. Since both profits and losses are amplified, it’s essential to size your positions appropriately to manage risk effectively.
When setting your limit size, there are two options to choose:
- Fixed dollar amount: This means risking the same amount for every trade, say $50 or $100. The amount will need to be adjusted periodically as your account balance changes.
- Percentage-based: This is a more flexible approach that allows each position size to scale with your account balance. Traders commonly set their position size between 1% and 5% of their balance per trade.
10. Account for slippage in volatile markets
Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed. This can often occur during periods of high volatility or when trading markets face liquidity issues.
Notably, delays in order executions can also cause slippage, which is why traders should choose a broker that offers reliable, high-speed access to live markets like Vantage.
Slippage can come in two forms:
- Negative slippage: When the trade executes at a worse-than-expected price, putting your trade at a disadvantage.
- Positive slippage: When the trade executes at a better-than-expected price, which is beneficial to you as the trader.
It may not always be possible to completely avoid slippage, but traders can mitigate its impact by:
- Properly leveraging limit orders
- Avoiding low-liquidity markets
- Refraining from trading during peak volatility
Put these risk management techniques to work
Recent headlines, including renewed trade tensions, have contributed to heightened volatility and raised the risk of a broader market sell-off.
In such uncertain conditions, traders are likely to encounter even more turbulence in the markets, making risk management more crucial than ever. Applying risk management strategies may help traders reduce the potential impact of market volatility.
Now more than ever, choosing a trustworthy broker is essential. Vantage offers a suite of advanced risk management tools and reliable, lightning-fast connectivity to real-time markets, supporting your trading journey in all market conditions. Explore the features of a live account to better understand the tools available for managing your trading activities.
