Top 3 CFD Trading Tips for Managing Risk

LONDON, February 15, 2012 /PRNewswire/ --

CFD Trading allows you to maximise your market involvement by only having to deposit a small fraction of your total trade value, whilst maintaining the same heightened exposure.

However, the main risk with leveraged trading is that your losses are magnified in exactly the same way.

Below, City Index outlines the top three CFD Trading tips for managing risk.

Tip 1. Apply Stop Losses

The first tactic in managing your risk is to apply stop losses to your CFD Trading account.

You can choose between a Standard and Guaranteed stop loss order; with the latter offering the greatest protection, specifically if gapping occurs in your chosen market.

A guaranteed stop loss is an order to close out a position at a level prearranged by you.

For example, if you 'go long' and buy 1 CFD of UK 100 at 5900, but do not want to risk losing more than £200 on your trade, you could set up a guaranteed stop loss order at 5700.

Say that the market was to go against you and hit your guaranteed stop loss of 5700; your trade would be automatically closed, preventing you from incurring any further losses.

There is a small charge, which can vary across different markets, for providing this added protection. 

Tip 2. Know your market

Understanding your chosen market is fundamental to your success.

You should understand how your market moves, what affects price movements, underlying volatility and if there are any forthcoming announcements that may impact its price.

For example, if a spike in crude oil occurs without your knowledge, and you start trading CFDs in British Airways shares; fuel costs will rise for the carrier and therefore may result in downward pressure on its share price, resulting in potential losses for you.

Understanding a market gives you the opportunity to react quickly and correctly when news emerges.

Moreover, it can also help you to know where to place stop losses or limit orders (see above).

Tip 3. Develop a trading strategy

Before entering a trade, create a trading strategy outlining where you want to take profits and more importantly where you are willing to take a loss.

At this point you can put in place a stop loss and limit order; by fixing your stop loss to your loss target and assigning a limit order to your profit target, your risk is notably reduced.

Summary

These three tips to CFD Trading are few of many available to traders at all levels. It is advisable to utilise a demo trading account with City Index before you start trading: http://www.cityindex.co.uk/learn-to-trade/demo-account.aspx

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 in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, Spread Betting.

We constantly look to improve the performance of our platforms and expand our range of services. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support.

SOURCE City Index