When it comes to trading outlook, most traders start out with a glass-half-full approach. They focus on the strategies, tips and techniques that will earn them the most money from their trading, which often breeds enhanced appetite for riskier strategies and abuse of leverage. But what they don’t tend to focus on as much is the other side of the equation – reducing the risk exposure of their trading – which can have just as much (if not more) of an impact on overall trading fortunes. Money saved is as good as money earned in trading, particularly considering the frequency with which traders experience losing trades. CFD trading is a game of aggregates, so every penny you can minimise in loss is a penny that doesn’t have to be offset from your trading profits.
This is an important realisation for most traders, and can deliver significant financial benefits to their trading account. Part of the process of mitigating losses depends on cutting out, or at least reducing the risk profile of a particular transaction or trading strategy, and there are a number of practical ways in which this can be done.
An effective way in which the risks of CFD trading can be contained is through the use of stop losses (and limits). Stop losses are guaranteed, automatic orders that close out your open positions whenever the price reaches a certain low-end trigger point. This is designed to guard against the possibility of runaway losing positions, and allows you peace of mind in knowing that your downside loss is limited. It is absolutely imperative that you set stops wherever you can, and as tightly as you can (taking into account some breathing space for positions that might tick in either direction on the road to profit). By using stops to their fullest potential as a cap on your downside liability, you are taking an incredibly important and often understated step towards minimising you potential losses.
Narrowing The Angle
A similar technique for using stop losses in an efficient way is by narrowing the angle for losses – i.e. by dragging your stop loss up with your position as it moves into profit. This effectively allows you to ‘bank’ portions of your profit without sacrificing your exposure to the position, and by consistently lifting the cap at which your position will automatically be settled, you are capitalising on the profits you’re already earned, rather than allowing them to be swallowed up if the market reverses. This is an important and highly effective strategy for closing down the potential for heavy losses, and helps ensure that you can maintain positions for as long as they remain profitable.
Managing Leverage Responsibly
Dealing with CFD leverage in a responsible and effective way is not something that is often taught in CFD trading manuals, but it is nevertheless one of the best ways to make sure you aren’t inviting risk in to your trading account. Encouraging risk is the worst thing you can do as a CFD trader, and by abusing leverage you’re really asking for trouble. To manage leverage in a responsible and measured way takes discipline, but also an understanding that risks are inherent and ever-present in any form of leveraged trading. By appreciating the severity of the risks involved, traders can begin to understand how best to use leverage as an investment tool, allowing them to better judge how heavily to back a given position.
Cutting out the risk component of CFD trading entirely will sadly never be a possibility, but it is within the reach of every CFD trader to lower their exposure to loss, and in doing so to improve the efficiency of their trading. By safeguarding trading profits and cutting out losing behaviours, it is possible to maximise your returns from CFD trading by playing the game in a smarter, more informed way.