How to Manage Risk When Trading CFDs

Contract for difference trading, or CFD trading, is a form of trading that involves speculating on the potential price movements of assets in the markets.

By betting on the movements of a particular asset, individuals are able to leverage funds and amplify their potential profit margins. This is done by choosing to either ‘go long’ (buy) or ‘go short’ (sell).

In this article, you will learn more about managing risks in CFD trading and how the platform Plus500 can help traders minimize these risks.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

Understanding CFD Trading Risks

As with all forms of trading, there are a number of potential risks for individuals wanting to try CFD trading.

Market Volatility

Markets can be volatile for a number of reasons, but CFD trading is often considered to be one of the most volatile ways to trade.

Slippage

This is the difference between the predicted price of a trade and the price it actually achieves. Slippage happens for several reasons, including market fluctuations, low liquidity, and volatile markets.

Leverage

As well as increasing the potential for profits, leveraging trades increases the risk of losses.

Emotional Risks

Market trading can lead to a range of emotional responses, including stress and anxiety. When losses happen, this can trigger negative emotions, and it’s important to understand your individual limits and triggers.

How Plus500 Helps Traders Manage Risk

For individuals looking to try trading for the first time or develop their skills and branch out into CFD trading, Plus500 offers a range of tools designed to help minimize risks for its users.

Stop-Loss Order

A stop-loss order can be set to automatically sell or end a trade if the markets fall below a certain point. This helps to minimize your losses and can be triggered at whatever level you choose.

Take-Profit Order

In a similar way to stop-loss orders, take-profit orders can be set up to automatically function at a specified point. When your trades reach a specified level of profit, they will automatically be closed.

Real-Time Alerts

Plus500 allows traders to keep up-to-date with changes in the market in real-time. This means that you can always be in the know, as changes happen, and will be able to act quickly to protect your investments and trades.

Negative Balance Protection

Negative balance protection means that you will never lose more than you invest in the Plus500 platform. Your initial funds will always be protected.

Demo Accounts

Plus500 offers users the opportunity to practice trading and develop strategies without risking real money.

By using demo accounts, it’s possible to experience everything that real-world trading would offer without any of the risk.

Educational Resources

With an extensive range of educational resources that are continuously updated, Plus500 offers users everything they need to learn about how trading works and how to develop effective strategies.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.

Key Strategies for Risk Management in CFD Trading

Knowing how to manage your risks is key to ensuring that you avoid losses when taking part in CFD trading.

There are several ways Plus500 users can manage their risks. This is especially important when using leverage.

Position Sizing

You should never risk more than you’re comfortable losing. Setting a specified percentage for trading and sticking to it will mean that you’re more in control.

Diversification

Always try to trade a range of assets. This way, if a specific area of the market is negatively affected by a development, for example, technology or finance, then you won’t be impacted as severely as if you had all of your eggs in one basket.

Avoid Overtrading

This is the process of buying and selling stocks excessively and can mean making trades too quickly or having a large number of transactions.

Overtrading often indicates a lack of trading strategy and an impulsive nature, both of which increase the potential for losses.

Risk Management for Different Market Conditions

The markets are constantly changing. This means that your strategies and risk management systems should also be constantly changing.

By continuously being aware of market conditions, you’ll be able to mitigate your risks and tailor your trading options accordingly.

High-Volatility Events

Elections, company finance reports, and news releases can all significantly affect the markets.

Keeping abreast of these events will help you to create a strategy that mitigates your risks and allows you to minimize your losses.

Limit Orders

Setting yourself stop-loss and take-profit orders will mean that you’re able to avoid excessive losses and take advantage of profits even when you’re not on the platform.

Plus500 offers users the opportunity to set automatic limits that trigger when market conditions reach your individually specified levels.

Regular Reviews

The markets change constantly, which means that your strategy will also need to be constantly evolving.

Regularly reviewing your trade, profit and loss data will mean that you can be ready to adapt and adjust your strategies in line with market trends.

Realistic Expectations

While CFD trading might seem like a great way to get rich quickly, it really is a case of slow and steady wins the race.

Set yourself realistic profit expectations and aim to build consistency in your trades.

Common Mistakes to Avoid When Trading CFDs

Trading comes with inherent risks, but there are several things beginner traders can do to help minimize their risks and avoid making mistakes when trading CFDs.

Overleveraging

You should only leverage what you can afford. Overleveraging increases your risk of loss just as much as it increases the potential for profit.

Ignoring Stop-Losses

Your stop-loss limits are there as a safety net to help avoid losses and are triggered by changes in the markets. Ignoring them means potentially losing money.

Trading Without a Strategy

You should always have a strategy for making trades and investing in the markets. Doing this without a plan in place opens up the potential for losses and increased risks.

Emotional Decision Making

Trades should always be made with a cool head. Allowing your emotions to influence your decision-making process opens the door for mistakes to be made.

Lack of Understanding

Failing to thoroughly understand the way that markets work and the risks associated with trading opens up the potential for riskier trades and losses.

Frequently Asked Questions

Final Thoughts

Trading inherently comes with risks, but CFD trading is often considered to be one of the most volatile ways to trade. Taking the time to properly plan a strategy and exercising discipline in your trades will help you avoid risks and potential losses.

Plus500 offers traders a user-friendly, regulated environment to practice trading, develop skills, and responsibly trade in a variety of ways.

WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. *CFD trading via Plus500’s demo account.