Controlled risk is where the amount of risk on a trade is capped at a certain level, typically through a guaranteed stop-loss order. This enables you to set the maximum possible amount you can lose on a trade, giving you full control of your risk.
A guaranteed stop is a stop-loss order that you set at a price level of your choosing. Once the price of the market you’re trading hits the level of the guaranteed stop, your position is automatically closed out. Using guaranteed stops to control your risk are effective as, unlike regular stops, they close out your position regardless of market slippage or gapping. Let’s say you open a long position on Meta, which is trading at $350, and you set a guaranteed stop at $300. As soon as Meta’s price falls to $300, your position will be closed. The maximum you can lose on this trade is $50 multiplied by the quantity you’re trading (e.g. trading £1 a point would make your maximum loss £50).
What are the most common ways to control your risk?
There are many common ways you can control your risk, ranging from risk-management tools to adopting certain trading strategies.
Stop-losses, including guaranteed stops, are useful trading tools as you can set them at the price level that you’d be comfortable incurring losses at.
Trading techniques such as hedging, where you open a position that opposes an existing trade, is another popular strategy to control risk. For example, if you have a long position open on Apple and you open a short position for the same amount, any subsequent profit or loss will cancel each other out. Traders will hedge during volatile periods to protect against strong losses if they want to keep their trade open.
The one percent rule can also be used to control risk. Following this rule would mean never risking more than one percent of your total account balance on one trade. If markets go against your trade, you will only lose 1% of the total account funds.