How to trade the stock market effectively and with lower risk?

BY Chris Andreou

|February 24, 2021

With single stock trades, we are sometimes exposing our trading accounts to more risk than we understand. If such trades are highly leveraged and held overnight, traders definitely take more risk than is necessary. In this article, I will take a look at some of those risks and recommend ways by which you can avoid these unnecessary risks while still achieving significant upside potential in your trading.

The biggest risk with single stock trading is the company risk, meaning that there can be highly volatile price reactions to the news that in one way or another concern the company traded. A successful CEO might decide to leave creating a leadership vacuum or one of the biggest clients or markets the company derives its revenues from could end up in trouble one way or another. Those that happen to be short at the time of negative news flow hits the fan and the stock price drops by several standard deviations are obviously happy but let me point to the keywording here: Those that h a p p e n to be short, benefit but due to the surprise nature of these events no one can have a constant trading edge based on them! All these events do is introduce an element of uncontrollable uncertainty and risk to your trading operation. And this risk is magnified by the (often high) leverage traders use.

The risky nature of single stock trading is combined with the fact that traders have to bear the overnight risk (stock exchanges close for the night). As stocks trade only during the day session, traders sometimes, due to market gaps, see their overnight positions excited at levels far beyond the stops they placed. Let’s study some of the options available for us as we look to limit these unwanted and quite frankly, unnecessary risks.

The first solution I am presenting to you is to use the single stock CFDs TIOmarkets offers. You can use the high leverage we provide to you but you can limit your risk by trading in the day sessions only. This means that you avoid the overnight risk as you open the trades during the day session and exit them by the end of the day. Higher leverage means you really need to choose your entry-level carefully in order to keep your risk acceptable (relatively tight stops) but at the same time, the higher leverage TIOmarkets provides you with allows you to magnify the intraday moves and thus gain meaningful profits. The issue of being exposed to company-specific news risk is still there but now your stops are relatively close and likely to trigger without significant slippage.

The second solution is to trade the equity index CFDs such as S&P 500 and Nasdaq 100. They represent baskets of stocks and therefore are not vulnerable to negative newsflow impacting single stocks in any meaningful amount. A negative earnings report from Apple could mean that these indices react lower but the impact isn’t going to be catastrophic, just a minor correction. These indices trade 24/5, 24 hours per day and 5 days a week. Your benefit is that, as long as you close your trades for the weekends and market holidays, you avoid a situation where the market might gap beyond your stop. Instead, these markets have ample liquidity and you are likely to experience only minor slippage.

Don’t dive into trading without a good understanding of the basics. TIOmarkets is committed to helping you to learn and develop yourself as a trader. This is why I run free webinars on monthly basis. You can also find other education material at TIOmarkets.com Go to TIOmarkets.com/webinars to register for our next Live Trading Strategy Workshop for free. I will be there to teach you and share from my 20+ years of experience in markets and trading. Also, if you haven’t yet done so open a VIP Black account with TIOmarkets. You will get a great trading environment with tight spreads and no monthly subscription or per-trade fees. Register here: TIOmarkets.com

Trade Safe,

Janne Muta
Chief Market Analyst

TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and it’s affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions.

The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analyzes and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits the duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved.

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Chris Andreou

Experienced independent trader

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Trade responsibly: CFDs are complex instruments and come with a high risk of losing all your invested capital due to leverage.