CFD Trading Tips for Managing Risk in the Australian Market

SYDNEY, Australia, March 20, 2012 /PRNewswire/ --

CFD is a leveraged product giving you the ability to profit from falling as well as rising markets. CFDs are traded on margin, meaning that you can gain a large exposure for just a fraction of the capital it would normally require to trade the underlying market. This means that your return on investment can be magnified, allowing for greater profits.

However, trading on margin can be a double edged sword as your losses are magnified with the potential to lose more than your initial deposit. In addition, you do not hold an interest in the underlying asset. For this reason, managing risk can play a crucial role in the success of your CFD trading account.

Your CFD trading success relies heavily on a comprehensive trading strategy, whereby realistic guidelines are set prior to trading.

Key aspects of this strategy are technical analysis and risk management; both play an important part in your trading success and can be fundamental to limiting your losses.

Prior to trading you must familiarise yourself with your chosen market; researching price trends and economic data.

You must also put in place risk management tools, such as stop losses, which are available through the trading platform with City Index Australia. When trading markets, in particular those that are volatile, such tools are imperative to limiting losses.

Creating a stop loss order on your trade will help you manage your risk and ultimately limit any potential losses. There are various other orders that you can choose from; below we look at each and help you decide which best suits you and your trade.

Opening Orders

An opening order is an instruction to execute a trade when the price of a market or instrument reaches a trigger value that you've set.

An order can support a range of trading strategies and can be highly useful, in particular, when trading volatile markets.

Limit Orders

A Limit Order automatically opens a trade at a better/preferred price by you.

For example, if the present price ('Our Price') of a market does not suit you or your trading strategy, then you can create a Limit Order.

This order will then automatically open a trade at your preferred price. (On the basis the market reaches that level.)

A Limit Buy Order allows you to create a new position at a lower price than the price quoted at that time, i.e. 'Our Price'.

Alternatively, use a Limit Sell Order to create a new open position at a price higher than the price quoted at the time, i.e. 'Our Price'.  

Stop Orders

A Stop Order automatically opens a trade at a worse price than the current price, i.e. 'Our Price', of a market. (This is based on the price of the market reaching your specified order level).

Use a Stop Buy Order to create a new open position at a price higher than the price quoted at the time, i.e. Our Price.

Alternatively, use a Stop Sell Order to create a new open position at a price which is higher than the price quoted at the time.

One Cancels the Other (OCO)

Use an OCO order to take multiple views on the same market; place two simultaneous opening orders and as 'Our Price' triggers one order, that order will be executed whilst the other order will be cancelled simultaneously.

Summary

Prior to opening a live CFD trading account, it is advisable to practice through a demo trading account to help familiarise yourself with our trading platform and your chosen market.

Trading CFDs on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment. In addition, you do not, or may not, hold an interest in the underlying asset. 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.

City Index is a leading global provider of margined foreign exchange and CFD trading. As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. To learn more visit: http://www.cityindex.com.au/