CFD Trading: Basic Aspects You Should Be Knowledgeable About Managing The Trade Risks.

By in Glossary on June 30, 2020

Why do folks pick CFDs? Well, some of the key reasons are the following ones:

Firstly, CFD differs from share trading, as while dealing with CFDs it is not required to own the actual shares of the company. As a matter of fact you will be able to derive benefit from the price movements, and no physical ownership is required.

Secondly, a CFD trader can trade on increasing prices (by going long) and lessening prices (by going short). This is a unique advantage which you will not be able to gain from when dealing with share trading.

Thirdly, you will not have to invest a lot of money, for the reason that you can start with a small sum.

Fourthly, the percentage of transaction amount, which is required for the margin, is really small and this is how the “leverage” effect is achieved.

Now you know about the most important pluses of CFD trading, and what do you know about risk management in CFD trading? This is a very crucial detail and that is the reason why we will have a closer look at it.

It is not possible to trade CFDs without a risk management system for a long period of time. The point is that in the case you do not control the risks, all money will go into a separate trade. And if you encounter losses in this trade, you will bear huge financial loses, which will easily force you out of the market. This consequently means that the opportunity of reclaiming the losses will be lost.

In simple words, risk management strategy is imperative for you, since it assists to indicate the sum of money to be invested in each trade. This way you will manage to diversify your risks and control losses.

To go into more details it should be stated that the most accepted kind of risk management is position sizing. It successfully aids to indicate what exactly sum should be invested in a trade.

It is also useful for you to remember that in order to calculate risks there is a need to estimate the extent of loss that can be born. This will be a basis you will be able to set a stop-loss price on. The distance between the stop loss cost and the entry is called the stop-loss distance.

It goes without saying that when dealing with risks management in CFD trading it is also crucial to deliberate other related expenses and financing costs, for instance, the rate of commission.

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