Market Volatility effects
The financial market is volatile and moves rapidly all of a sudden. Events like a natural disaster, political upheavals, or major employment announcements can affect bonds, equities, commodities, and currencies. Volatility provides trader golden trading opportunities, but simultaneously it can cause significant losses.
CFD Leverage impacts
CFD trade is derivative and leverage product. A contract for difference needs small deposit amount [few percentage of total physical share value] called margin. Thus, with a small initial capital layout, traders get exposure to a large position. This means that correct movement direction brings multiplied gains, but if the market moves in opposite direction losses will get magnified equally.
Understand risk management
Volatility and leverage are two major risks, which needs to be understood. Risk or money management tools are effective to help traders limit their possible losses without any restriction on your profit potential.
A range of tools is available to manage CFD trade portfolio effectively without any need to constantly keep an eye on your open trades. You just check this out on the potential website. Tools include education package, which helps to improve your CFD trading knowledge.
It helps to make trades more confidently. The real-time economic calendar includes major events, which affects market moves that help to plan trades. Stop loss order is also an efficient risk management tool.
Tips to manage risks
1.Discipline & money management skills
Each trade includes risk because the market is volatile with unpredictable moves. Even a sound fundamental and technical analysis can prove a trader’s informed judgment to be wrong. The trader needs to be disciplined and apply money management to combat the risk presented on every trade.
Discipline and money management skills are crucial because if you lose discipline then a single bad trade can lose the profits earned from efforts of weeks or months.
2.Apply margin sensibly
Prudently size your CFD trade position. This means, you don’t need to use all your capital but just a margin. Make sure to hold an adequate amount in the account to cover losses till the expiry of the specific open position. If your account does not have enough funds to keep open position then there are chances you will find yourself placed on a margin call. You experience the risk of a closed position, automatically.
3.Sensibly size positions
Make trades you afford to risk comfortably. It is totally irresponsible to risk your total capital on one open trade position. Unfortunately, if large positions move in opposite direction then your account gets wiped out. Never invest 100% capital on a single trade, for example, if Deutsche Post share price is $3.65, and if you have capital $20,000 then just risk 10% of this amount on any single trade.
4.Use stop loss
Rather than risking close out automatically use stop loss order, especially it helps when the market price gaps. Significant market volatility along with rapid price changes creates a market gap. This means the closing price will differ from the set trigger price.
If the risk is elevated and there is a need to position stop loss more away from entry point then reduce trade size. Alternatively, if the risk is presumed to be low and your small stop loss displays favorable profits, then increase trade size, accordingly.
5.Hedging strategy adds insurance
CFD equips trader to sell short and reap profits from falling prices. Therefore, investors sometimes use it as an insurance to balance portfolio losses. Stop loss orders may not hold 100%, so have longs and shorts on different shares to hedge against sudden price moves.
Achieving consistent returns allow you to stay in the market rather than risking and losing all the capital, especially when there will be a big opportunity and there will be no cash-on-hand to get on-board.