Targets

Setting a target and managing risk is also important. For example a common approach is to apply a 3:1 risk-reward ratio. In other words, a profit target should be three times the amount you are prepared to lose. If you’re buying the UK 100 at 6,000 with a 300-point target, this strategy would entail setting a stop-loss at 5,900 and limit order at 6,300.

Stakes

Risk management also impacts your position size. Many traders would never risk more than 2% of their stake, but it’s largely down to personal preference. Risk is about what you are comfortable with, not what someone else thinks.

Losses

Too many traders cut winners and let losses run. A successful trading strategy needs to see this reversed – cut the losers early and let the winners run and run. This, of course, is harder in practice than in theory.

The most important tool in managing risk is the simple stop-loss. Stops mean you can set the maximum level of loss you are prepared to sustain for the trade. Stops can act against the trader – if you set it too close to the entry point you may get stopped out before your spread bet has a chance to make a profit. But triggering a well-placed stop is better than losing more than you have in your account.