Risk Management and CFDs


Combining a well-tested and proven risk and money management policy with your CFD trading strategies is possibly the most vital action that you can undertake in order to enhance your success and profitability. Risk management entails calculating the optimum sum of money that you should wager per CFD in order to provide the maximum protection for your account balance.


The Importance of Risk Management

You must appreciate that risk management is a vital component of your CFD trading strategies. Sadly, most beginners totally fail to comprehend the significance of this vital notion and subsequently a large majority of them lose their initial deposits rapidly. One of your optimum strategies to ensure succeed at trading CFDs is to create or attain a strategy that contains procedures capable of dealing proficiently with the following central attributes of trading: method, mind and money.

For instance, you require a strategy (method) to help you detect quality entry opportunities for your CFD trades. You must also enhance your mentality (mind) so that you will retain the levels of tolerance and self-control that are essential to operate your strategy successfully. Finally, you should design your risk management plan (money) in order to optimize the protection for your equity.

Even if beginners do try to construct a strategy then they tend to primarily concentrate on the method part only because they usually structure their designs utilizing trading charts. As such, they totally ignore the importance of the mind and money features. This failure implies that their final strategies are normally faulty and generate failure in most cases.

For example, your primary task as a trader is to safeguard your account balance at all times because without it you cannot trade CFDs any further. However, natural instincts will attempt to seduce you into focusing on profits first instead of concentrating on controlling your losses. You will also discover that most newbies possess a psychological bent of thinking that all their positions will produce winners. As such, they are totally unprepared for any unexpected difficulties.


Planning for Losses

As the financial markets can produced the most complex price formations, you must acknowledge that losses are virtually unavoidable. You should therefore appreciate that successful investors are those that master the skill of minimizing their losses by controlling them correctly. This is the main reason why you must attain a risk management policy that will allow you to limit your risk exposures while optimizing your returns.

You must appreciate that attaining this objective is vital to acquiring success at CFD trading particularly because of the high levels of volatility and leverage entailed. Never forget the famous trading maxim that advises: “look after your losses and your profits will take care of themselves.”


Registering Profits Consistently?

Specifically, CFD trading is mainly about odds and that you only possess total control of your own account balance until the instant you execute a new trade. From then onwards, price dominates proceedings since you cannot be fully sure whether your positions will generate losses or profits.  However, you do possess the ability to assess, by deploying a proven money management strategy, the maximum loss you could endure should price advance against your active CFDs.

In addition, you should strive to operate a CFD trading strategy that exhibits a minimum reward-to-risk (RR) ratio of 2 to 1. If you can attain higher ratios, then that is advantageous. The next example will assist you in appreciating the theory of the reward-to-risk ratio. Envisage that your strategy possesses a win-to-loss ratio of 50% which infers that you will win ten out of every twenty trades.

You must therefore attempt to register profits in compliance with a 2:1 reward-to-risk ratio in order to guarantee consistent worthwhile returns.  As such, you must aim for 100 point profits if you plan to constantly deploy stop-losses of 50 points. If these circumstances are achieved, then you will endure ten losses of 50 points each, but record ten wins of 100 points each. Consequently, you would have registered a total profit of 500 points despite suffering ten losses.


The Importance of an Exit Strategy

You may probably have spent some time studying how to enter new CFDs without considering a good strategy about how to exit them. You will discover that there is more to this skill than you may originally think because of the elements of human nature that are involved.

For instance, you may have become concerned that price has suddenly moved against your CFD. Under such circumstances, fear could have made you exit your position prematurely before price rebounded into its original direction. You may then have watched in frustration as you witnessed serious profits amassing which you could not access any further.

Perhaps you have also experienced greed encouraging you to cling to a position with the hopes of increased profits. This is even after your trading strategy has issued clear exit signals. To overcome the above problems, you need an exit strategy which you can trust and that has a sound scientific basis. You will also discover that developing an effective exit strategy can also bolster the positive effects of a well-tested risk management policy.

Leave a Reply