Managing Risk in CFD Trading

0
281

A good risk management strategy should be an integral part of your trading practice. Without it, you will have a hard time sustaining a successful CFD account. The first thing accomplished CFD investors decide on is how much money they are willing to lose based on capital and profit target. 

Therefore, that ought to be the first thing to factor in as you get into trading. Your profit target should be calculated on a timeframe. For instance, how much do you hope to make in a week, a month or even daily? 

CFD trading allows you to trade various products without owning any of them. Some of the products you can trade include:

  • Indices
  • Equity shares
  • Cryptocurrencies
  • Forex
  • Commodities

You can find reputable brokers in UK who offer CFDs on a vast range of securities. When you purchase or sell a CFD, you are culpable for the difference between the buying and the selling prices. 

Managing Risk

Simply put, this alludes to how much money you are willing to risk and how much you hope to gain. Every strategy you establish must take into account your risk tolerance. Also, your risk tolerance should be customised to your specific purposes independent of other traders’ risk tolerance.

Why You Should Learn to Catch a Trend

It is important to learn to catch a trend. This is because to trade successfully and employ your risk management strategy, you must earn more than you lose. In other words, you are catching a trend. 

When creating a trading strategy, you will first install technical indicators into your trading tools. Your technical indicator gives you the signal to buy an asset once a shorter-term moving average goes over a longer-term one.  

Cut Losses and Let Profits Run

This concept is important especially for trend-following approaches. Your risk management strategy should include this concept via a trailing stop-loss. This stop-loss technique adjusts with the market variations. 

When creating your stop-loss technique, you can opt for a percentage or a whole number. You want your position to remain steady until there is a positive change in the market. 

Once the market starts climbing you move your stop loss up the market turns around and strikes your stop-loss. This allows you to take full advantage of your trade as you catch a trend. You may, however, need to find a broker that allows you to trade with a trailing stop loss.

Trading CFDs with Proper Risk Management

If you are new to CFD trading, it would be prudent to trade with paper before you risk your money. This will allow you to test if your trading strategy can be a success. Also, once you choose a strategy, stay with it. 

Many new traders unwisely quit positions too early if they start losing money. You need to give your strategy a chance to prove whether it is a winning one or a losing one. 

On the other hand, a rookie trader may stick to their market until it goes past the stop loss level. The risk of ruin is high if you do this. 

With CFD trading, you are using leverage. When the leverage is higher, you run a greater risk than when it is lower. In order to be successful, you must determine what leverage your broker provides. Also, it is very important that you find out which instruments you are using.

Conclusion

Trading comes with a certain amount of risk and every trader must be open about that possibility. No trading is immune to the risk of loss. For this reason, you should figure out how much capital you are willing and able to risk before you begin trading. 

Risk management styles should be tailor-made to suit individual traders. Factor in your investment goals, risk tolerance as well as your disposition. Also, you must keep in mind that your reward is based on the risk you take. Hence, your trading strategy needs to have a positive reward in relation to your risk ratio.