Both Forex and CFDs use leverage which means that you get to multiply your gains as your losses. You can take on larger potential profit but you also get to have a greater risk. Because of that, it is important to understand your risk tolerance before the start of the trade. It is considered a prerequisite when you choose to do leveraged trading.
It is true that there are a lot of risks associated with Contracts For Difference (CFD), but it is also important to remember that there are several ways that you can reduce them.
Your opportunity to profit is always connected to several risks. Therefore, your risk management strategy is all about the tools and instruments that you can use to prevent huge losses while maintaining higher gains and profits. The risk management in CFD trading is mainly based on these principles – recognizing the risks, analyzing the risks, finding the solution to minimize the risks, and managing the solutions of these risks consistently.
For a new or seasoned trader, the primary focal point that they had to tackle is the assessment of the market. Although the correct market position is considered important, pro traders see risk management with the same importance as the right market position.
One of the major reasons for most CFD traders to join the market is because of leverage. Leverage has become the driving point of new traders because the margin requirement is reduced if you compare it to a full asset investment. The main concept of leveraged trading is that you put less but you gain more. Although there are advantages to consider, it is important to note that if the market goes against you, there’s a huge possibility of losing more than you invested.
It is either that, you gain more in leverage or you lose more which is the consequence that you have to take. One of the reasons for losses is due to overleveraging, which means that if you select a leverage level that’s too high, you can’t manage it properly. It is true that you can just reduce the size of your investment to avoid overleveraging but your potential profit will also be reduced. In this case, it is important to carefully pick your leverage in accordance with your risk appetite and your account volume.
Trading CFDs is always subjected to market movements. Every time you start an order, it goes on negatively since the spread is deducted to open an order. Keeping these things in mind, there’s a huge chance that your market assessment won’t always be accurate and you might be losing profits from time to time. But the number of losses can be controlled through the use of stop-loss orders and a particular level where you want to take the loss. But when using stop losses, you must remember to not use it narrowly as it might cause your order to be closed even on small market movements.