A risk management plan is very important to attain success in trading. Even those prominent people in CFD trading and Forex have their own plan to counter possible downfall. Traders who cannot produce a promising risk management plan will find CFD trading difficult to sustain, much more, be profitable.
Right before you enter your first position on CFD, you first need to formulate a plan to manage the risks involved. After that, you need to determine your gains and compare it to the risk ratio then understanding the leverage should be your next move.
What is CFD?
CFD is short for Contracts for Differences. It is a trading instrument that’s widely used nowadays especially in equity shares, cryptocurrencies, indices, commodities, and currencies. One of the most known advantages of CFD is the trader’s capability of not posting the whole security value of the transaction cost.
CFD Risk Management
One thing that you need to consider when planning risk management is your risk tolerance. The strategy that you develop should all be based on your business plan and the risks and gains involved. It is especially important to understand that in every trading platform, there are different risks involved. Therefore, every trader must have their own and unique risk management plan. It is also right to note that a profitable trader does not take overnight in achieving their goals. Your success will be realized after such time you acquire the right knowledge and qualities of becoming a great CFD trader.
Risk vs Gains and Profit Factor
Before any transaction, a trader must be able to pinpoint the risks and gains involved in that particular transaction. The first ratio that you need to consider is the rewards against the risk ratio. Secondly, the profit factor should be considered.
Gains versus ratio is the trader’s reward after successful trading divided by the risks that are involved. This ratio is very helpful, especially for new traders. The second ratio to consider is the Profit factor. When calculating this ratio, you may use these two formulas:
Profit Factor = (gross winning trades) / (gross losing trades)
Profit Factor = (Win rate x average win) / (Loss rate x average loss)
Put on a Technical Indicator
After forming a strategic plan to counter the risks, it is now time to insert a technical indicator right on your trading tool. Catching a trend is also very important because it lets you know the best way to earn much more compared to your losses.
More Profits and Cut Down the Losses
The success of trading is determined by the number of wins. Losses are inevitable but it should not overpower your profits. There is this so-called stop-loss which is very helpful in this case. The main goal for this technique is to hold onto the position until such time that the market gets reversed. This will give you the maximum time with your trades as you catch a trend. There are already a couple of CFD brokers out there that provides stop loss. It is advisable to get business with these brokers especially if you are new to trading.