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Ready to give CFD trading a go? Here's a strategy to ensure you don't decimate your trading pot

by , 09 October 2014

If you decide to trade contracts for difference (CFDs), before you even think about putting your first trade on, you need to work out how you're going to manage your funds.

You'll never be 100% accurate with your trades, so it's vital you have a strategy in place to limit your losses.

As CFDs are geared financial products, with the potential to make healthy profits from small moves in share prices comes the chance of making large losses.

So what can you do so you survive and thrive to trade another day?

Read on to find out…

How to limit your losses when you trade CFDs

The first thing you need to do is decide how much money you’re going to start trading CFDs with.

Let’s say you decide to put R100,000 into your CFD trading account.

To limit your losses, don’t trade more than 10% of your trading pot in one CFD trade. Combine this with a 20% stop loss.

Do this and you won’t lose more than 2% of your trading pot in one trade.

Let’s look at this with the help of an example.

Assuming you have R100,000 in your trading pot, you’d only use 10% of this in your first CFD trade. So R10,000.

If the trade doesn’t go as planned and it hits your stop loss, you’ll lose R2,000. That works out at 20% of your initial investment into the trade.

Using a risk management strategy is a vital part of trading CFDs

This means you’d now have R98,000 left in your CFD trading pot.

When it comes to putting on your next CFD trade, you’d put R9,800 into your next trade.

Before you begin trading CFDs, you need to think about how much money you’re happy putting to work. And how much you’re happy to lose.

Before placing a trade, think about the potential outcomes of the trade if it should hit your take profit level and if it should hit your stop loss.

So there you have it, a strategy to ensure you don’t decimate your trading pot when you trade CFDs.

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Ready to give CFD trading a go? Here's a strategy to ensure you don't decimate your trading pot
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