CFD Trading and Risk Management in the Australian Terms of Trade Boom

SYDNEY, January 31, 2012 /PRNewswire/ --

In recent news, the Australian Terms of Trade boom has seen the demand for exported raw materials soar sharply. But whether traders choose to trade CFDs during the market movements or hedge their portfolios using Contracts for Difference, employing risk management tool is still an important part of trading, even in a bullish market.

The wool booms in the 1920s and the 1950s helped Australia ride the sheep's back to prosperity. This time, Australia is riding the Chinese Dragon's back to prosperity. And the dragon is made of iron and steel and zinc and copper and breathes fire made from coal exported from Australia.

As more countries integrate in to the world economy, the demand for raw materials increases, exerting upward pressure on commodity export prices. But however Australian traders may have profited from CFD trading or using Contracts for Difference to hedge their portfolios of raw materials, a proper plan implementing risk management tools is essential for minimising losses and locking in profits.

Because CFD trading is a leveraged product, it involves a higher degree of trading risk compared to other forms of trading such as share dealing. This results from the fact that only a small deposit as margin is required in order to trade a larger exposure. But while the potential for gains is high, traders may quickly lose more than the amount of funds that they hold in their accounts if the market moves against them significantly.

Fortunately, there are a number of ways to help minimise losses and City Index offers trading tools such as Closing Orders to help you to do this.

Peter Esho, Chief Global Strategist at City Index states that: "The key to CFD trading is making sure your total profits outnumber your losses. When traders take profits too early and run their losses, they are already making life difficult for themselves."

Stop Loss Orders & Limit Orders

The City Index online trading platform utilises an order system which allows traders to manage trades and minimise risks, even when they are not in front of a trading screen. Orders can be created to close trades when prices reach a specific level.

Stop Loss Orders can be used to close a trade to prevent further losses i.e. stopping your losses. Although there is a small risk that the closing price could be different from the order level if there is a gap in the market prices when the shares being traded next open for business.

A Guaranteed Stop Loss Order will ensure that the trade closes at the stop loss level determined, regardless of any market gapping, although a small fee is charged for this added protection.

A Limit Order is an instruction to close out a trade at a price that is better than the current market level and is used to help lock in profit targets.

Make a Plan

While knowledge of the trading platform features is essential, common sense and a practical approach are just as important as any tools.

Mr Raymond added: "When trading in general, it pays to safeguard yourself against emotions. It can be easy to get carried away and make impulsive trading decisions."

Proper planning with something as simple as a spreadsheet to outline profit goals and sustainable losses as well as entry and exit points for each trade can quickly and efficiently manage a wide range of CFD trades.

It is also advisable to trade a variety of markets to help spread the risk of your portfolio. By placing all of your eggs in one basket, this will help to prevent your account from living and dying by a single trade.

Learn more about CFD trading with a City Index at: http://www.cityindex.com.au/cfd-trading/

CFD trading is a leveraged product which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including, CFD trading, margined foreign exchange and, in the UK, spread betting.