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How To Reduce Trading Risks When Using CFDs

Stock-Markets / Risk Analysis May 01, 2020 - 05:47 PM GMT

By: Submissions


CFDs are traded instruments that give you access to the possibility of trading different products, like indices, commodities, shares, currencies and even cryptocurrencies. Countless reputable brokers now offer CFDs and they are really popular as they offer the possibility of making a profit when the market goes up and when the market goes down.

The problem with CFDs is that when you use leverage, you can easily lose more money than you initially expected. Although the process is pretty straightforward, it is really important to be prepared and to properly manage your risk. Here are some tips to help you do exactly that.

Risk Versus Reward

All successful traders know that they are faced with a risk when a trade is opened, just like they know the potential reward. You need to analyze reward versus risk because it helps you decide whether or not a trade should be started. It is calculated by dividing reward by risk. As an example, when winning $20 on a trade you win and you lose $10 on a trade you lose, the risk versus reward ratio is 2 to 1. As a new trader, this is a highly beneficial trade.

Catching Trends

A great way to reduce risk is to create a trading strategy that uses technical indicators in order to identify trends. As you identify a trend and you follow it, you have a much higher possibility that you are going to make successful CFD trades. You can use moving averages of 20 days or 50 days for the highest possible accuracy. As you trade trends you can end up with a risk versus reward ratio of 10 to 3, which is very beneficial.

Letting Profits Run And Cutting Losses

When you trade CFDs, it is vital that you cut losses and you let profits run, especially when your goal is to follow trends. When you create your risk management strategy, these two concepts are particularly important.

A percent stop loss can be created to activate on a specific number. This would automatically change your stop-loss orders to make the most money while losing the least.

Reduce Day Trading Practices

Day trading is popular among the advanced traders but should not be used by beginners. Most of the day trading strategies focus on exiting and entering positions during the timespan of just one day. Before CFD trading, you have to evaluate historical daily ranges. This helps you make smart choices based on historical data. However, you need to know that it is really easy to make mistakes when you use day trading. The risk that you are exposed to is automatically increased.

Final Thoughts

CFDs trading can be quite lucrative for traders but you need to properly analyze the risk that you are exposed to if you want to make smart choices. At the end of the day, everything revolves around the same principle of winning as much as possible and losing a lower amount with the losing trades. You will have to deal with losing trades so you have to be ready for them.

By S N Chatterjee

Copyright 2020 © S N Chatterjee - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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