Four tips to manage your risk if you're trading CFDs
Over the last few years, CFDs have become increasingly popular in South Africa. In fact, “it's thought that in the near future, they'll kick single stock futures off the top spot and become the most popular trading product in South Africa,” says the Ultimate Contracts for Difference Guide. But, if you're taking advantage of what CFDs have to offer, it's crucial you manage the downside risks also. Read on to discover how to manage them…
Many traders overlook the importance of “employing money management and sound psychology when trading CFDs, but they are of the upmost importance,” says the Ultimate Contracts for Difference Guide.
Manage your CFD trading risk using these three tips
The psychy of a trader. The major emotions that impact your trading decisions are fear and greed. As a CFD trader, you have to master your emotional responses and add in patience and discipline to trade successfully. You also have to “appreciate, you cannot control the market, you can only hope to go with the flow,” advises the Ultimate Contracts for Difference Guide.
Don’t let greed get the better of you. When you have a winning CFD position, greed might swing your selling decision and encourage you to hold the position far longer than you should. Another risky move is adding to your winning position. Both these scenarios can result in disaster. If you add to your position size, you’re continually increasing the average price. If the market suddenly moves against your position, you could close out your position with a much smaller profit than you should. There’s also the chance your winning position will become a losing one.
The position size – crucial to your money management. Before you embark on trading CFDs, you need to set yourself rules about how you’ll work with your money. You need to decide how much of your total funds you want to trade CFDs with, how much you’ll commit to each trade and how much you’re prepared to lose. So, “when you start out trading, start small. Don’t over commit to a particular position. Don’t be tempted to commit 100% of your trading capital to a single CFD margin. Don’t set stop losses and then not act on them,” says the Ultimate Contracts for Difference Guide.
Knowing how to manage your risks will enable you to trade CFDs with success.