Probably one of the most ignored aspect when it comes to CFD trading is risk management. This happens because people come in the world of trading with a mindset that is poised to lead them towards losing the money they have invested. It’s interesting to note that in a research conducted by a series of online brokers, it turned out that most of the retail traders are managing to have around 50% accuracy, meaning they are able to make money in 50% of their trades.
Cut losses half and let profits run
Despite that fact, retail traders end up with less money because they cut profitable traders and maintain losing positions for longer periods of time. The way we are built as humans does not help us to be good traders.
Although we managed to evolve over time, we still have a negativity bias generated by a primitive part of the brain called the amygdala. Our biology stands in the way of our success in CFD trading, so we need to be able to take control of our actions, design a plan, and follow it to the tea, in order to be among those people that manage to generate consistent results.
The math behind risk management
If you already have some experience with CFD trading, you know that it is impossible to anticipate the market moves 100% of the time. Because of that, losses are part of the game and the goal of risk management is to reduce those losses and exploit winning trades to the max in order to generate an edge.
Briefly speaking, if we talk about risk management, we must take into account three variables:
- Accuracy (percentage of winning trades)
- Reward to risk ratio
- Percentage of capital at risk.
By constantly monitoring these numbers (on a weekly or monthly basis) you will be able to design and constantly model a risk management system that will help you generate returns. All three variables mentioned above are crucial, especially the reward to risk ratio. It is absolutely important to let your profits run and reduce your risks. Target at least 3 times more than you risk and in the long run, your losses won’t count. Percentage of capital at risk should be low if you are at the beginning. Risk 2%, 1%, or even less, if you are not able to generate a consistent accuracy of 50% or higher.
Trade Responsibility: 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high Risk of losing your money
Author Name – Meet Morakhiya
Author Bio – Meet Morakhiya is a content strategist, expert freelance writer, and online entrepreneur. He loves to share practical business tips that help small businesses build brand awareness, engage their target audience, and generate more leads. To get in contact with Morakhiya, feel free to reach out to him via email.
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