The First Step In CFD Trading: Understand Risk

For profitable CFD trading, a proper trading system alone is not enough. You need good risk management. One of the most crucial decisions while taking a trading position is fixing the amount of money you wish to risk on this trade. The thumb rule is anticipating two percent risk. This rule indicates that no position will have more than two percent risk on the total capital of the traders.

Some of you might wonder why the risk percent does not go beyond two percent. The reason is to prevent the trader experiencing a series of losses, which may result in wiping off their complete capital at a time. CFDs are influential trading tools. This means that you get exposed to a larger component of the tool as compared to your total deposit. Therefore, you cannot stay aloof of risks here. Besides, financial markets are famous for being unpredictable. Profit and loss are a part of trading and you cannot avoid them. However, you can limit the loss and retain your CFD trading capital. This is important to stay in the trade for long.

How To Avoid Risks

For a trader with 50,000 pounds, two percent risk means losing 1000 pounds per trade. For the entire trade capital, it would take 50 direct losses for the trader to lose his or her complete capital. For this to happen, you need to be extremely unlucky! A few wrong trades here and there are common. However, with no proper understanding of CFD risks, you can lose up to 10,000 pounds per trade. Beware; such loss could wipe your entire amount in just 5 straight losses! You would not even need to be unlucky for this; it is simple mathematics!

Remember, CFD trading is not everybody’s cup of tea. You must be familiar with how the things are done, along with the risks involved.

Benefit Of Risk Management

Suppose you know that your CFD system generates A percent returns, B percent maximum drawdown, and Z number of losing trades. Now, assuming that the system performs well, you are able to get desired results in real-life trading, provided you manage risk properly. The benefit of proper risk management is that, in case you encounter a time of drawdown or losing trades, you can face the losses and manage to create returns for that time. In short, you will NOT be doomed.

If you do not manage risk in CFD trading, it is like sitting on the edge of a cliff. For instance, you have placed a big chunk of your capital in each trade. You may observe that just a few losing trades are able to wipe out your entire capital and you perish from the trading scenario. Just forget about making profits!

Perhaps that is the reason why there is such a fuss about risk management in CFD trading. Experts say that it is good to understand risk first and then trade. You may be an expert in putting money, but if you ignore risks, you are soon out of the market.