These days, all anyone ever seems to talk about is the coronavirus pandemic. Apart from the catastrophic effect that it is having on the health of people around the world, the lockdown is seriously impacting on our ability to be able to make money. This is where those of us who have experience in CFD trading have a unique advantage. Whether you are in South Africa or any other place in the world, using services like FXTM CFD trading can be a great way of making money without lifting a finger.
Like all trading, CFD trading comes with inherent risks. These risks are amplified at times of market volatility. To help minimize these risks and turn your instincts into profit, we have put together a list of trading tips for risk management.
1. Position Sizing
Do not overstretch your account. Keep smaller positions which ideally do not represent more than three per cent of your account on any one trade. This means that if your account is worth 100,000R, you should hold any individual positions that are worth more than 3,000R. Keeping your position sizing low will ensure that you protect yourself from losing too much if one of your stocks crashes.
2. Cut Down on Leverage
Trading with leverage is a great way to maximize profits, but it can also lead to equally large losses. If a stock falls below a certain proportion of your original investment, you can lose your leveraged position completely. Leveraged positions are risky at times of financial stability, but this is even truer in times such as we find ourselves in now. As a result, it is a good idea to look to sell off any stocks that you hold with leverage.
3. Stop Loss
Stop loss is an instrument that allows you to automatically sell your position when you reach a predetermined loss. At times of market volatility, you need to adapt your use of stop loss so that it is not triggered too early. Stock prices at the moment have a habit of falling violently due to mass sell-off caused by trader fear only to recover sharply the next day. If your stop loss is set near the bottom of the trough, you will end up losing a significant chunk of your investment.
4. Limit Orders
Another useful instrument available to traders is limit orders. Orders allow you to set a price at which a stock will be automatically bought. An example of a limit order may be setting an order to buy a certain number of stocks in Ford Motors Co. if it lowers to $4.60. Setting orders has the advantage that you will not miss the fleeting moments where a stock price lowers to a level at which it makes good sense to purchase. This may happen if you do not have your phone to hand or at night when you are sleeping.
5. Long Before the Weekend
The Forex markets in stocks and shares is not available at the weekend, but this does not stop prices from rising and falling in reaction to news or market sentiment. As a result, holding shares when you have no power to buy and sell like at the weekend is an unwise move. We advise leaving your position on Friday and then reinvesting on Monday to insulate yourself against higher levels of risk.
In theory, market instability opens up a whole world of opportunities for savvy CFD traders. With nobody really sure what the future holds or when things will begin to get back normal, prices have been subject to a huge degree of fluctuation. It goes without saying that there is a lot of money to be made if you can accurately predict these rises and fall and have the guts to follow through on your feelings. However, if you want to trade safely, you should put some of the practices mentioned in this article into practice to insulate yourself against losing more than you can afford when a stock price crashes. If you keep your wits about you and play it safe, there is nothing to stop you cashing in in what remains of 2020.