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Why stop losses are your saving grace when trading CFDs

by , 29 September 2015

Trading contracts for difference (CFDs) can be extremely profitable, but trading CFDs is also risky.

If a trade doesn't pan out the way you want it to, you can lose more than you initially put into a trade.

So how can you deal with this risk?

You must use stop losses…

How stop losses work when you trade CFDs

When you trade CFDs, you can place stop losses with your stock broker when you put a trade on.

How a stop loss works depends on which broker you trade through. For some brokers, if a trade hits its stop loss, the trade closes automatically. For others, you’ll receive an email or SMS warning you about what’s happened.

Stop losses should form a vital part of risk management for you as a trader. Ignore them at your peril.

If you place a long trade, your stop loss will be below your entry price. If you enter a short trade, your stop loss will be above your entry price.

There is the possibility that your trade will gap through your stop loss. This means your losses could be more than you anticipated.

How to determine your stop loss

Deciding on your stop loss level should be part of your trading strategy. You should know what percentage you’re willing to lose on each trade you put on.

For more volatile stocks, you may choose a wider stop loss.

What’s important to bear in mind is, the more CFDs you buy, the higher your potential losses are.

Of course, once your set a stop loss for a trade, it’s not set in stone. You can change your stop loss at any time.

You should avoid moving your stop loss to increase your potential losses, but tightening up your stop loss to preserve profits can be beneficial.

So there you have it. Why stop losses are your saving grace when trading CFDs.

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Why stop losses are your saving grace when trading CFDs
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