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 take steps to manage exposure and reduce the impact of 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 support their trading approach.  

1. Use stop-loss orders to manage 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. They are commonly used as a risk management tool to help limit potential losses, but they do not guarantee protection in all market conditions, especially during periods of high volatility or price gaps. 

Once triggered, a stop loss order instructs the broker to execute the trade at the best available market price. There are two main types of stop-loss orders: 

• Sell-stop orders are used to manage risk in a long position, by instructing the broker to sell the asset when the price falls under a predetermined trigger price.  

• Buy-stop orders are used to manage risk in a short position by instructing the broker to buy the asset when a predetermined 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 and they do not guarantee protection in all scenarios.  

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 close to the entry price, it may cause a trade to be closed prematurely.  

2. Understand negative balance protection 

Negative Balance Protection is a feature offered by many regulated brokers. Simply put, it ensures that a trader’s losses cannot exceed the amount they have deposited in their trading accounts.  

With a negative balance protection, should a trade cause a trader’s account to result in a negative balance, the broker will automatically close 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 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 an inappropriate order type may increase exposure to unwanted market moves 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 order 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 

When the markets are falling, investors often face difficult decisions. It is understandably frustrating to see your position dropping day after day.  

While it may be tempting to sell your holdings during a market downturn, doing so also mean accepting relatively unfavourable prices—and potentially cause you to miss out on future recoveries when the market rebound. 

Some traders may consider short-selling as a way to manage 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.  

Be wary, though—as the reverse also applies. If prices rise while you’re holding a short position, your losses will increase.  

Short-selling is a complex strategy and carries a high level of risk. It may be used as part of a broader risk management or hedging approach, but it is not suitable for all investors. 

5. Reduce exposure through diversification 

Diversification is a widely used strategy to reduce trading risk, by spreading your positions across different assets and markets.  

This approach can help reduce the impact of adverse 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 may be less sensitive to volatility in any single asset or sector. While diversification may support a more balanced risk profile, it does not eliminate risk entirely or guarantee against loss. Its effectiveness depends on the quality and composition of the assets selected, as well as overall market conditions. 

6. Trade “safe-haven” assets in uncertain markets 

Safe-haven assets are generally perceived to perform differently from the broader market during market volatility–maintaining, or even increasing, their value during downturns – though this is not guaranteed.  

This perception is based on several common characteristics of the “safe-haven” assets are:  

• Being relatively low correlation or negatively correlated with the broader market;  

• More resistant to inflation or devaluation due to having limited supply;  

• Able to enjoy consistent demand throughout all market conditions; and  

• Likely to have permanence (i.e. physical or economic durability), which means they are not easily replaced or destroyed  

Examples of commonly referenced “safe-haven” assets include gold, defensive stocks, AAA-rated bonds, and selected currencies.  

In periods of market uncertainty, some investor consider reallocating a portion of their portfolios  toward “safe-haven” assets as part of a broader risk-management strategy. While historically regarded as more resilient in times of market stress, no asset is entirely risk-free. Past performance is not a reliable indicator of future results. 

7. Apply dollar-cost averaging (DCA) for volatility control 

Market downturns may create uncertainty for investors, but this also means assets are may now be available at a relatively lower price levels. This may present opportunities for investors to invest in 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.  

Dollar-Cost Averaging (DCA), a risk management technique where a trader makes fixed-amount purchases at regular intervals, regardless of asset price. This helps average out the entry price over time, helping you to minimise the impact of short-term market volatility and the risk of investing a lump sum at an unfavourable time. Therefore, DCA is often considered a long-term strategy. Yet, while DCA can help reduce timing risk, it does not eliminate market risk or guarantee returns.  

8. Potential Offsetting of losses with trade loss coupons 

Some brokerages may offer Trade Loss Coupons, which could provide partial compensation for realised losses on closed trades, subject to specific conditions. These coupons typically carry a fixed value determined by your broker and may be applied on closed trades, providing traders with risk management and reduction of losses.  

While Trade Loss Coupons may help reduce net trading losses on closed trades. However, it’s important not to rely on this protection by taking on unnecessarily risky trades, as its application is subject to restrictions, and it is important to check the terms offered by the broker carefully.  

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. Also, while this may help reduce the impact of specific trading losses, they do not eliminate risk or guarantee profitability. Traders should avoid increasing their risk exposure based on the availability of the trade loss coupons.  

9. Optimise risk with smart position sizing 

Choosing an appropriate position size is one of the key 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. Therefore, position sizing appropriately can help manage potential gains or losses in line with your account size and risk tolerance level. 

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. Setting position size thoughtfully can help support your risk management approach, but it does not eliminate risk. 

When setting your limit size, there are two commonly used options to choose:  

• Fixed dollar amount: This means allocating 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 some traders consider execution speed and high-speed access to live markets as important factors when selecting a broker. However, even with fast execution, slippage may not be entirely avoided. 

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 potentially 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 to set maximum or minimum acceptable prices 

• Avoiding low-liquidity markets 

• Being cautious or 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 risk management tools and access to real-time markets, designed to support your trading journey. Explore the features of a live account to explore  the tools available for managing your trading activities. 

Disclaimer:  CFDs and Spreadbets are complex instruments and come with a high risk of losing money rapidly due to leverage. 67.9% of retail investor accounts lose money when trading CFDs and Spreadbets with this provider. You should consider whether you understand how CFDs and Spreadbets work and whether you can afford to take the high risk of losing your money.    

The information has been prepared by Vantage as of 10 April 2025 and is subject to change thereafter. The information is provided for educational purposes only and doesn’t take into account your personal objectives, financial circumstances, or needs. It does not constitute investment advice. We encourage you to seek independent advice if necessary. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty is given as to the accuracy or completeness of any information contained within. This material may contain historical or past performance figures and should not be relied on. Furthermore estimates, forward-looking statements, and forecasts cannot be guaranteed. The information on this site and the products and services offered are not intended for distribution to any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.  

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