CFD Trading: How to Manage Your Risk

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All trading comes with the risk of loss. The markets will not always favor you as they can be erratic depending on many factors. This is why you are advised to only risk what you are comfortable losing.

CFD trading has its own singular risks. It is important to learn how to manage these risks to keep your losses to a minimum.

The Risks, Causes and How to Mitigate Them

Some of the risks that you are likely to be exposed to include the following:

  • Losing more than you deposited
  • Losses exceeding your account balance
  • Positions getting closed unexpectedly
  • Your order is filled at a different level than what you requested
  • Sudden unexpected losses

Here is a breakdown of the causes and how to mitigate the risks mentioned:

1.     Losing More Than You Deposited

CFDs are leveraged. This means that you are only expected to stake a portion of the value of your trade in order to open it. Hence, it is possible to lose a lot more than you deposited. On the flip side, you could also win much more than your original deposit.

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How to Manage This

The best way to manage this risk is to lock in your profits. This is done by setting an automatic stop or restriction. This helps to determine the level at which you want your trade to close.

2.     Losses Exceeding Your Account Balance

It is possible for your position to close leaving your account in the negative. This would mean that you owe your platform money and can be a huge set back in your trading endeavors. Fortunately, your platform can help you in managing risks such as this one.

How to Manage This

Fortunately, there is negative balance protection. Go for a platform that supports this. Your account is taken back to zero at no cost.

3.     Positions Getting Closed Unexpectedly

If your account balance fails to cover the set margin, then your platform may have little choice than to close your positions.

How to Manage This

  • Watch the running balances on your account
  • Increase the funds in your account if that is required

4.     Your Order is Filled at a Different Level from What You Requested

A market can suddenly move a long way causing your order to be filled at a different level. This level could turn out to be better or worse than the one you had requested. This is known as slippage.

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How to Manage This

Employ guaranteed stops to protect against slippage on your ‘to close’ orders. You will not be charged for this but a minimal premium is expected in the event that your stop is triggered.

5.     Sudden Unexpected Losses

As mentioned earlier, markets are erratic and can move suddenly and very fast. Movements can be triggered by an announcement, political or other even as well as trade behavior.

How to Manage This

  • Set stops
  • Check any compelling movements on your account
  • If there is an alert, you should react to it as advised in order to keep your positions open.

CFD is a worthwhile market and can make you lots of money if you trade carefully. It is imperative that you choose your platform carefully so that you can benefit from working with the experts. Additionally, always remember to risk what you are comfortable losing and do not over trade.

Conclusion

Markets can be quite temperamental changing direction at the slightest provocation. Traders must be able to anticipate erratic movements that may cause losses. It is important to keep abreast with happenings around the globe as some of them can affect the markets and cause sudden movements.

Experienced HK CFD traders keenly observe market movements. They also know that even political changes such as electing a new leader can have certain effects on the markets. These can be both positive and negative. However, they are better able to put measures in place to reduce the chances of making huge losses.

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