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Risk management for CFD trading

  • Post category:Strategy
  • Reading time:8 mins read

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Especially in CFD trading, appropriate risk management is of decisive importance for profit or loss. Since CFD trading in particular tries to profit from even the smallest price movements, you as a potential investor should always use the right hedging of your positions in order not to suffer a total loss in the end. This requires a comprehensive, personal risk management, which can be a system created by yourself to reduce your individual risk.

It does not necessarily have to be a sophisticated system, but rather reasonable automatisms that facilitate your trading in crisis situations. But also certain order types can drastically reduce your risk in CFD trading. However, it takes some practice to find the right trading strategy, to set price alerts or to work with a traling stop.

In the following sections, you will learn all about risk management in CFD trading as well as about different order types such as stop loss, trailing stop and price alert. The information contained in the article will serve you as a practical aid in the creation of your individual trading strategy.


Step 1: Reduce losses with a stop loss

The stop loss is a common order command that allows you to hedge your positions to the downside. This basically means the protection against losses. If you enter into a "long trade", the stop loss protects your position against losses. If, on the other hand, you enter into a "short trade", the stop loss again protects your position upwards. As soon as the stop loss is exceeded, your CFD is automatically closed by your broker.

Ideally, you should not set your stop loss too tight. Compared to the take-profit counterpart, where you hedge your profits upwards, the ratio between stop loss/take profit should be 1:10 on average. This means: 90 percent profit upwards, but only tolerate a maximum of 10 percent loss downwards, or hedge.

Closely related to the stop-loss order commands are also the following:

  • Market stop (order is not executed until certain price or certain price level is reached)
  • Guaranteed stop (actually triggers at targeted price value, even if there are major "price slides" in the meantime - makes sense especially in highly volatile markets)


Step 2: How to protect your profits with a trailing stop order

A trailing stop order is basically a modified stop loss order. However, it is automatically trailed as soon as your position increases into the profit zone. The word "to trail" comes from the English language and means something like "to trail something" or "to pull something along with you". As long as your position is increasing, the stop loss order here will automatically trail.

If prices fall again in the meantime, your trailing stop of the long CFD stagnates and is then triggered again as a market order as soon as the price falls below a certain value. Thanks to this practical order type, you cannot easily lose profits once they have been made. Thus, the trailing stop acts exactly according to a particularly profitable principle in CFD trading: Limit CFD losses as much as possible, but always let CFD profits run!


Step 3: Thanks to the new negative balance protection through EU regulation, no more fear of margin calls

The new negative balance protection of the EU is intended to protect small investors from high losses in CFD trading, which can be caused especially by CFD trading with high leverage. Accordingly, you as a potential CFD trader cannot lose more capital than is available on your trading account at the start of the trade.

The corresponding EU-wide regulation has been in place since June 1, 2018, according to which no CFD broker based in the EU may pass on a margin call to its investors or traders. It does not matter whether the CFD broker is based in Germany, Cyprus or the UK, for example.

The regulation for the outdated margin call applies everywhere in the EU, respectively everywhere where the respective brokers offer their services - so the regulation also applies, for example, if it is a CFD broker from outside Europe.

Thus, as a trader, you no longer need to fear that you will fall into the debt trap when trading CFDs due to too high leverage. A total loss is now the worst thing that can happen to you monetarily in CFD trading. Nevertheless, you should not exaggerate in terms of leverage and always operate a sensible money management - but more about that later!


Step 4: Be prepared for special market events

Doing CFD trading in calm waters is certainly easier than in very hectic market phases. However, you should act with higher caution in extremely volatile markets. Such volatility can be caused by economic or political events such as the release of quarterly figures, central bank meetings, trade agreements, wars, as well as large waves of layoffs or product news.

By staying abreast of world events on a daily basis, and keeping abreast of events that could potentially affect your positions, you are less likely to allow such volatility to lead to unexpected losses. To stay up to date, you should therefore constantly do the following things in addition to CFD trading:

  • watch daily business news on TV, internet portals and business forums
  • Read the quarterly or annual reports of the companies whose shares you are trading.
  • deal with political changes in the world
  • research all information about product news or strategy changes of the companies whose shares you want to trade
  • avoid the capital market in extreme crisis situations (for example, Corona crisis 2020)


Step 5: Be sure to set up price alerts as well

A price alert is another practical tool that you can use for CFD trading. These are small price points that you set yourself. As soon as the price points set by you are reached, a price alarm is triggered in the form of a small message. The CFD broker will then inform you about this circumstance and you can immediately take action.

By the way: You can position the price alerts in the profit direction, but also in the loss direction of your trades. They serve as a useful extension of your trailing stops or stop losses. With a price alert you are always well informed, even if you are not actively watching the chart - for example on the way in the bus or train or in the party band on the couch.

Many online brokers now also offer price alerts, which you can set and also delete again. This is a free tool, which will make CFD trading easier for you in any case and also considerably reduces your individual risk!


Step 6: Find your right trading strategy and stick to it

You should always trade with strategy and plan. Therefore, it is absolutely elementary that you first create an individual trading strategy. This determines the following points in particular:

  • at what times you want to trade
  • which markets you want to trade (only domestic or also foreign?)
  • which assets you want to trade (for example stocks, commodities CFDs or Forex?)
  • how much capital you want to use in each trade
  • how much loss you are willing to lose per trade at maximum
  • which trading technique you want to use
  • which chart analysis techniques you want to use regularly
  • how you want to react in profit but also in strong loss situations (for example, close trading account for the rest of the day and gain distance, etc.)
  • basically the definition of your individual trading psychology


You can also test your new trading strategy on a free demo account before "arming" it! Many CFD brokers now offer free demo accounts where you can learn CFD trading with the help of play money and market-like prices. Of course, you can also use such tools to come up with trading strategies and test them or adjust them on a regular basis.

In any case, you should always stick to your individual trading strategy in the end. This serves you as a guide and compass, even in difficult stock market phases!


Step 7: Money management - small order volumes and low leverage

Last but not least, when trading CFDs, you should of course also make sure that you adhere to appropriate money management. You should already anchor this in your trading strategy! Ideally, you should never risk more than a maximum of 5 to 10 percent of your available equity per trade!

Of course, this means that your order volumes should be as small as possible, but as large as necessary. Only in this way you can enter several trades at the same time, some of which will turn out to be successful and some of which will turn out to be a loss.

Likewise, you should not choose your leverage in CFD trading too high. This is because in the event of a margin call, they can quickly eat up your equity and cause you to suffer a total loss. Therefore, as a beginner, it is best to trade without leverage at all, or increase it later only gradually to 1:3 or 1:5. Not all CFD brokers allow you to vary the leverage. Or choose underlyings whose CFDs generally have a lower standard leverage.