CFD trading has been increasingly popular in the last decade thanks to technological advancements, low barriers to entry, and the ability to trade on margin in many different markets within one single trading platform. CFD, or Contracts for Difference, are financial derivatives allowing you to trade the rise or fall in an asset's price, putting aside a small portion of the total value of the trading position. This amount is called “margin”.
With margin trading and leverage, active traders have the chance to take advantage of greater market exposure to potentially make more profit. However, the risks are equally increased as well, so you could potentially lose more money. That’s why CFD trading should always be used with strict risk management rules to protect your trading capital. Here are 3 tips on risk management you should take into consideration when trading CFDs.
1# Always implement money and risk management rules before you start trading
The first tip is obvious, but many CFD traders start without properly understanding what risk management is, why it is necessary, and what it truly implies. Risk management can be described as the process used to control the overall risk threatening your portfolio in order to limit losses and keep a good risk/reward ratio.
The more risk you take, the greater the reward (or the loss). That’s why you should always implement money and risk management rules in your trading. But what does this mean exactly? How can you do it? Well, there are a few things you can do to practice good money management that’s in line with your trading style and financial goals. Consider the following:
- Never trade the money you can’t afford to lose in the markets
- Start small and build your capital while you gain more experience
- Avoid over-leveraging your positions
- Decide the maximum amount you want to risk per trade
- Do not invest all your capital over a single trade
- Determine the maximum number of losses you can accept per day/week/month
- Adapt the size of your trading positions depending on market conditions
- Time your trade according to your trading plan
- Use stop-loss and take-profit orders
- Cut losses short and let profits run
- Have realistic goals
2# Follow your trading plan
These money management rules should all be included in your trading plan, acting as a guideline to follow when trading. In addition to money and risk management rules, a trading guide also describes your trading strategy, so then you know exactly how and when to enter/exit the market, and how to manage your open positions.
Always following your trading plan is therefore mandatory if you want to succeed in your CFD trading activity over time, as it leaves no room for interpretation or feelings. All you have to do is to follow the steps described in your trading plan, which is a reflection of your trading style and personality.
3# Adopt the right mindset
Knowing how to make appropriate decisions when trading is essential for good risk management. For that, you need to be in the right mindset. Stay cool and do not overreact to what’s happening in the markets and how it will impact your portfolio. Always maintain discipline and stay focused on your strategy over the course of your trading day, so then you don’t let your emotions, or so-called “intuition”, guide your trading decisions.
Active traders like CFD traders need to understand risk management to make money in the market over time. These 3 tips are a great start to protect your capital, but there are many more risk management strategies you can follow to become (and remain) profitable, so always keep looking for more ways to improve your money management practices.
Disclaimer: No Deccan Chronicle journalist was involved in creating this content. The group also takes no responsibility for this content....