Managing risks is very important in CFD trading. In fact, it is considered the most important element for you to become a successful trader. It is more important to manage your risks in CFD because although you can possibly double your profit, you may also double your losses if your traders are not managed pretty well.
A lot of traders think that options trading is the riskiest trading form. It is, actually, at the very least because you can expose your entire trading account into a long-shot bet. Trading CFDs also has the potential to do this as well. In CFD, you can actually lose more than the amount you invested and wipe off your account.
The Use of Stop Loss Orders in CFD Trading
Stop-loss order is being used to mitigate the risks in other forms of trading. But with the higher risks that trading CFDs has to offer, it is even more essential to use these risk management tools. Since leverage is involved in trading, you may actually lose before even getting close to your desired profits. A piece of good trading advice would always involve the use of stops every time you trade.
Those who are not very familiar with trading, they would choose to ultimately dial down their leverage to avoid all the possible negative effects of trading. Although you surely can do this, you may also want to mitigate the risks by using stop-loss orders.
Before you enter a trade, you do have the power to specify how much you are willing to lose in one trade by using a stop-loss order. It is important to use stop-loss orders in any trade and even in a much longer investment term. This will not just limit the amount that you may lose but also, set a price where a trade won’t be desirable to enter.
Having a clear exit plan is very important as much as an entry plan so you can avoid being hurt ultimately. A stop loss is placed at the maximum loss that you are prepared to have after executing an order.
Managing CFD Risk with Position Sizing
In CFD, just like the case of other forms of margin trading, a trader can control their risk exposure if you take into consideration your position sizing. If you have 10,000 in your account and the leverage ratio is 100:1, you can easily choose the amount that you want for leverage. In this case, if you want to trade 10:1 leverage, you can trade the $1,000 and reserve the remaining $9,000. This percentage of leverage is possible with the trader’s desire.
Most traders are not very familiar with this strategy as they may always go to the maximum limit of their leverage. Then they end up in an undesirable position because they only expose themselves to too many trading risks.
Therefore, using the most leverage that you can obtain isn’t always a good decision and might result in problems later on. Your leverage ratio must always fit your CFD trading strategy