As well as creating opportunity for profit, CFD trading also increases opportunity for loss. By formulating a trading strategy and remaining disciplined, investors can reduce the risk of loss and increase the potential for profit. To manage risk, traders should:
Establish a trading plan
It is crucial, before trading, to decide your trading strategy. Decide entry points, exit points, and your objectives. Once you have started trading be disciplined and stick to this plan.
Apply Money Management
Manage your money effectively. Set an amount of your overall equity you are comfortable with using on margin. For example, if you were comfortable with 10%, and your account is worth £100,000, then use £10,000 as initial margin per trade. Keep to this 10% figure whether your account gains or loses.
Use Stop Losses and limit Orders
Don't ignore stop losses and limit orders. These are crucial to minimising risk, especially with a product such as CFD which is traded on leverage.
Don't try to buck the trend
Traders often say, 'the trend is your friend'. Don't assume your stock will be one to buck the trend so follow it. At the same time, learn to recognise when a trend is coming to an end.
Don't be afraid to short
The majority of CFD traders take long positions because they want the market to go up. Don't be afraid to take a short position. If it helps, turn a chart upside down and pretend instead you are buying the dips.