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How to Manage Risks Trading CFDs?

Read more about what Forex trading is, how to trade Forex and discover a range of tips and strategies.

CFDs are a leveraged product. Trading on CFDs carries risk and losses can exceed deposits. To better manage risks, there are a number of simple tools available on online trading platforms.

Stop Losses

01Stop Losses

A standard stop-loss lets the trader control the amount of money they are prepared to lose in any given trade. A stop-loss ought to be set at the same time as placing the trade order, as prices can change rapidly.

cfd_how_to_manage_risk_stop_losses

A standard stop loss lets you set the maximum level of loss you are prepared to sustain for the trade. Of course a stop can act against you – set it too close to the entry point and you could get stopped out prematurely. However triggering a well-placed stop is better than losing more than you can afford.

If you go long (buy) into a market your stop-loss would be set below your open price. If you were to short the market (sell), the stop would be above the open price.

Trailing Stops

02Trailing Stops

A more sophisticated stop-loss strategy involves using trailing stops. These are a way to further reduce risk and lock in profit while keeping the trade open.

A trailing stop loss can be set at a fixed number of pips above or below the market price. It allows traders to move stops without constantly checking their screens, making a powerful and practical risk management tool.

For example, if you open a long position on the FTSE at 6,000 and had a 10-point trailing stop against it, your stop would start at 5,090. If the FTSE were to rise to 6,010, the trailing stop would track this and move up to 6,000. If the market were to rise to 6,020, the stop would move to 6,010 and so on.

If the market started moving back against you, or retracing, the trailing stop would stay where it is to lock in any profit or stop you out for a loss.

Trailing stops cannot be guaranteed. During times of severe market volatility or when gapping happens the stop may not be triggered at the price you set.

03Guaranteed Stops

A guaranteed stop order is one that will be filled at the price you set, although charges will apply to cover this added layer of insurance.

04Limit Orders

You can also add a limit to the trade. A limit is the opposite of a stop-loss and is way to set a target price at which your trade will be closed out. If you go long (buy) into a market your limit would be set above your open price. If you were to short the market (sell), the limit would be below the open price.

Guaranteed Stops

A guaranteed stop order is one that will be filled at the price you set, although charges will apply to cover this added layer of insurance.

cfd_how_to_manage_risk_guaranteed_stops

Limit Orders

You can also add a limit to the trade. A limit is the opposite of a stop-loss and is way to set a target price at which your trade will be closed out. If you go long (buy) into a market your limit would be set above your open price. If you were to short the market (sell), the limit would be below the open price.

cfd_how_to_manage_risk_guaranteed_stops

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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79.6% of retail investor accounts lose money when spread betting or trading CFDs with ETX. You should consider whether you understand how spread bets orCFDs work and whether you can afford to take the high risk of losing your money.

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79.6% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.