If you decide to try your luck with CFDs, you have to be aware of how risky the market can be. Despite the fact that there is no need to buy an asset, the market is unpredictable, and you can lose the fortune in no time. Many people decide to trade CFDs for the benefits this trading type offers, but you still can’t underestimate the possible risks.
Downsizing the Risk
The newcomers usually start with the popular techniques and winning strategies that quickly help to gain money. And the bigger the profit you earn, the riskier you become. You end up completely neglecting the leverage. It is natural that many traders at this stage ignore the risks of their trading. Cutting out can minimize your losses and reduce the risk profile in general.
Using Stop Losses
This is one of the simplest ways to minimize risks, known from the very beginning. You can provide the limits in your strategy. Stop losses are automatic orders that close open positions on the market you have when the price goes to the low-end point you choose as a trigger. The strategy is great for everyone who can easily get carried away. Basically, your downside loss is narrowed down.
Narrow Down the Losses Angle
Drag the stop-loss higher to the position when it starts mobbing into the profit. You can bank the pieces of your profit without the threat to expose your position. This procedure will consistently lift the cap, and you can capitalize on the profit that you have earned. If you are worried about the possible heavy losses, you may start with narrowing the angle and keeping the positions in order.
Focusing on Leverage
You need to learn how to deal with the CFD leverage before you start using it. If you don’t want to get broke and owe the money to a broker, you have to become more responsible. It is not that hard to learn. Don’t encourage the risk by abusing the leverage. Find out the risks you are working with, and it might help you in the future. Leverage is a great investment instrument, but only if you know the toughness of risks.
Catching the Trend
Successful CFD trading requires a curious mind that never stops learning. If you don’t want to explore the market every day, think about the change of the craft. You have to monitor the market until you see all the connections, like in the Matrix movie, and are able to predict the upcoming trends. This is not that hard; all you have to do is insert several technical indicators into the tools you are using. Use the moving average crossover strategy to monitor the trends of a medium-term so that you can sell or buy CFD. Indicators will remind you to buy the asset when the shorter-term moving average crosses above the long-term moving average. The reverse action may be done after the twenty-day moving average goes below the fifty-day moving average. Allow yourself to lose 3 percent in order to receive 10 percent.
Risks of Liquidity and Gapping
Conditions of the market have a crucial impact on many transactions and may raise the risk of losses. The contract can easily become illiquid when there are only a few trades made for the asset you choose. Providers of CFD, in this case, can ask for extra margin fees. Another option is to close the contract at a price worse than expected. In both cases, you lose.Â
The price can fall even before the trade is executed because of the fast-moving market. It does not matter whether the price was agreed upon or not, and this is called gapping. You can lose your money in no time. The holder of the contract must be asked to take lower than optimal profit or just cover the losses of the CFD provider. With the stop-loss technique, you can significantly decrease the possible risks of similar situations. Many CFD brokers offer such services among their tools. With this order, the contract is automatically closed whenever it meets the predetermined price.
No matter whether you pay only a small fee hoping for large returns, CFD can still be risky. Your losses may be severe, even though you don’t own any assets on the market. Illiquid assets are never good news for the trader who has already received the contract. This is why you have to understand the possible risks and whether you are ready to lose money or not.
Risk, Reward, and Profit
All traders who are interested in success on the market should learn their risks in advance and understand which CFD markets and assets will suit their interests. To understand the risk, you can pay attention to the two ratios in this formula:
- Reward vs. Risk ratio;
- Profit factor.
The first factor is the reward you have that is divided by the risk. Successful strategy always has the possible losses calculated. The ratio is beneficial for new traders. Just decide the positive ratio you want and apply it no matter what happens during the trading time.
The second one is your pure profit. You can calculate it by dividing the gross winning trades by the gross losing trades. You can also multiply the average rate of wins on the trades that were successful.
Read the News
CFD traders are highly dependable on the news from the country, world, economics, politics, harvest, and demands on the assets they buy or sell. The shares may drop or rise based on multiple factors. You have to consider all of them. Experienced traders can forecast the scenario for the next few days. And the most talented analysts can even predict unforeseen situations and prepare for them in advance.
Strategy of Success
No matter which asset you pick, start with learning everything about it. Learn how to minimize risks so that you will not lose much even if you face this situation. While CFDs markets are entered by thousands of newcomers, not many of them stay even for a week. If you want to make a profit from the market, you have to learn how to do it without risking all your money.
