Risk Management in CFD Trading

CFD Trading is leveraged trading, which means you can increase your market exposure whilst only depositing a fraction of the actual trade value. However whilst this means your potential gains will be magnified, you can also increase the size of your losses including losing more than your initial deposit so risk management is important in CFD Trading.

By using the correct risk management tools of your trading platform you can increase the size of your gains whilst still making sure you limit your potential losses.

STOP LOSS ORDERS

Most (if not all) trading platforms will allow you to set a stop loss for your trade. This is the level at which your trade will automatically be closed if the trade is moving against you. Doing so enforces your trading discipline and limits the size of your potential loss. ¬†Unless the stop loss is a ‘guaranteed’ stop loss your trade could be closed at a level other than this if the market gaps. Your trade will be closed at the best available price after the stop loss level is triggered.

CFDs AS A HEDGING TOOL

As cfds allow you to go short (SELL) against the current market value you can profit from falling markets in addition to rising ones as with traditional share dealing. This gives you the potential to use CFDs as a hedging tool to protect your share portfolio against losses during market falls. In effect this is a form of insurance against your original share trade. whilst you are losing money on the value of your shares during a market fall, you are gaining profit from your short selling of a CFD on the same instrument. This can also be useful for long term investors to protect against short term market falls without having to sell out shares from your portfolio.

 

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