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Two ways to minimise your losses when you trade CFDs

by , 15 May 2014

When you trade contracts for difference (CFDs), or any other financial product, it's crucial you manage your losses. No-one enters a trade thinking it's going to turn against them, but it's something you have to be prepared for. Otherwise you're not going to survive very long as a trader. So what can you do to minimise your losses? You can opt for a stop loss or a trailing stop loss. Let's take a quick look at both of these and how they work…

Using stop losses when you trade CFDs

A stop loss is so important that you’ll find your CFD broker probably won’t let you trade without one. A stop loss is a great way to protect you if a trade goes against you.

Let’s say you went long (buy) 200 Company ABC CFDs. They’re trading at R143 each. You decide you’re going to trade with a 2% stop loss level on your exposure. This means you set your stop loss at R140.14 (2% x 10 times gearing).

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By setting a stop loss at this level, it means you’ve limited your risk to 20% of the money you’ve put down on the trade.

If the trade goes against you and triggers the stop loss of R140.14, your trade will close.

Depending on who you trade CFDs through, this might happen automatically.

A stop loss is a fixed amount, the team of experts at FSP Invest in The Ultimate Contracts for Difference Guide explain in. It won’t change unless you alter it.

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Applying trailing stop losses when you trade

Trailing stop losses also minimise your losses when you trade CFDs. They work in a slightly different way to a fixed stop loss.

When you place your trade, you can put on a trailing stop loss. The difference here is you need to advise how much the stop loss should trail the share price by. Should the share rise in value, then pull back, it will trigger the stop loss and close the trade.

Let’s say you enter a trade. When you place your trade, you instruct the broker to have the stop loss trail by 50c. If you bought into the shares at R250 and it rose to R290 then fell, you’d exit the trade at R289.50.

Equally so, if this was a short trade and the share price fell to R210 then rose, you’d exit the trade at R210.50.

So there you have it, two ways to minimise your losses when you trade CFDs.

Two ways to minimise your losses when you trade CFDs
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