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Knock-outs (KOs) are a type of Contract For Differences (CFD) product that enables you to manage your risk more thoroughly while still being able to enjoy the benefits of market volatility.
Knock-outs offer traders a disciplined way to trade, as you are required to evaluate your risk and set your Knock-out level at the beginning of each trade. The Knock-out level is the amount of risk you are willing to take for each trade, as you cannot lose more than your margin.
With such risk management measures in place, Knock-outs make a good product for both amateur and expert traders who would like to take advantage of market volatility whilst controlling maximum risk.
Knock-outs allow you to trade in a wide range of markets including the share, forex and index markets. Knock-outs is a type of CFD trading but differ slightly from the conventional CFDs trading in some key ways, notably in how they enable you to manage risk, while still offering exposure to market volatility.
How can you optimise your Knock-out trades even further?
Trading Knock-outs can closely resemble trading CFDs. However, you are able to take advantage of certain unique features in order to refine your trading strategy and manage your risk more closely.
Here are two ways to optimise your Knock-out trades.
1) Adjust your leverage
Leverage is a powerful tool that can direct your trading strategy. When trading Knock-outs, you can tailor your use of leverage in accordance with your own risk tolerance. You have the flexibility to set leverage ratios on every single trade, so you can even set different leverage ratios for multiple trades on the same asset.
If you prefer a more risk-averse strategy, you can select a Knock-out level with a greater KO distance, creating lower leverage. For instance, you might opt for a KO distance of 5%, giving a 20:1 ratio on a longer term knock-out position to be held over a few weeks or months.
On the other hand, those with a higher risk tolerance can opt for a Knock-out level with a shorter distance, creating higher leverage. For instance, a small 1% KO distance could suit trading for short-term volatility or market movements which could be the result of macroeconomic news.
2) Use stops on top of Knock-outs level
For an even greater degree of risk management, you have the option of using stops on top of your desired Knock-Out levels. With the use of IG’s charting tools, you can visualise your stop, limits and KOs as well as work out a risk/rewards ratio.
If your stop is triggered before reaching your Knock-out level, the trade will close. Using stops can also save you from having to pay the knock-out premium (which is only paid when your knock-out level is hit) if your trade gets closed by the stop.
With a double stop loss level, you can close the trade at the best available price, while your Knock-Out level acts as a safety net to further help you mitigate against market slippage.
You can also trade using a take-profit strategy. In this case, you set a floor and ceiling with the goals of both protecting losses and locking in profits.
No matter what your trading style, learning how to manage your risk well is essential. There are avenues for you to brush up your knowledge, and one of which is via IG Academy, where you can educate yourself on how to use the IG platform’s tools to better manage your risk. The key is to familiarise yourself with the various ways in which you can customise your trades and then incorporate these features into your trading strategy. To understand more about knock-outs and the alternatives to FX CFD trading, download IG’s free e-book, written in collaboration with Bloomberg.
Do you have any questions about trading Knock-outs? Ask away in the comments!
This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, published half yearly financial statements, June 2019).
All views expressed in the article are the independent opinion of MoneySmart and do not in any way reflect the views, opinions, or endorsements of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”).
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No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of the information. All forms of investment carry risks. Trading in leveraged products such as CFDs carry risks and may not be suitable for everyone. Losses can exceed deposits.
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