Risk Diversification for Retail CFD Traders

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How to Manage Your Risk in CFD Trading

Your first task should be to decide, based on your capital, the amount of money you are willing to lose and your profit target on a specific timeframe (daily, weekly, monthly, etc…)

Following this decision and prior to entering your first position, you should formulate a risk management plan, determine your reward versus risk ratio, and understand the leverage you are using by your broker. In this article, we will cover those fundamental ‘rules of thumbs’ for a successful trading strategy.

Contracts for Differences

Contracts for differences (CFDs) are widely traded instruments that allow you to trade several products including equity shares, indices, commodities, cryptocurrencies, and currencies. Many reputable brokers like HQBroker offer CFDs on a wide variety of

securities. When you buy or sell a CFD, you are responsible for the difference between your purchase price and your sale price without actually owning the instrument.

The amount of capital you need to post for a CFD will depend on the volatility of the instrument. One of the advantages of CFDs and the reason for its popularity is that you do not need to post the entire value of the security but a partial amount of the overall transaction value.

CFDs are geared to investors looking to speculate on the direction of any security or currency pair and provide an advantage over standard shares or ETFs that are purchased via exchanges. For example, if you are interested in trading shares of Apple stock, the amount you will need to post for a CFD is approximately 5% the amount you would post if you purchase the shares at a stockbroker. A retail CFD broker will evaluate the most you can lose based on the CFD and provide you with a margin calculation.

Risk Management

The risk management that you incorporate into your trading strategy should be based on your risk tolerance. Each strategy you develop should be based on a business plan that describes how much you plan to risk as well as the gains you expect. It is important to understand that every trader has different risk tolerance and therefore, every trader must form an independent risk management. For that purpose, it takes time to become a profitable trader as you must realize your trading qualities and flaws.

Risk versus Reward and Profit Factor

Successful traders are aware of the risk they will take on each trade and the reward they will receive prior to executing a transaction. There are two ratios that can help in this process. The first is the reward versus risk ratio and the second is the profit factor.

The reward versus risk ratio is your reward divided by the risk. Successful trading strategies will gain more than they lose. For example, if you win $2 on every winning trade and lose $1 on every losing trade, your reward to risk ratio is 2 to 1. That’s quite simple. For new traders, this ratio can be beneficial. You need to decide on a certain positive ratio and no matter what happens during your trading time, you must apply this ratio.

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The second ratio is the profit factor ratio. To calculate this ratio you divide your gross winning trades by your gross losing trades or, alternatively, you multiply the average win rate on successful trades by your winning percentage and divide that number by the average rate on unsuccessful trades times your losing percentage.

Profit factor = (gross winning trades) / (gross losing trades) or = (Win rate x average win) / (Loss rate x average loss)

Catching a Trend

One of the more common steps following forming a trading strategy is to insert technical indicators into your trading tools. The moving average crossover strategy is geared to catch a medium-term trend where you purchase/sell a currency pair or CFD. The reason why it’s important to learn the skills to catch a trend is that in order to be a profitable trader and apply your risk management strategy, you need to know how to earn more than you lose, meaning catching a trend.

The indicator signals you to buy your asset when a shorter term moving average (20-day moving average in this case) crosses above a longer-term moving average (50-day moving average in this case). You would transact the reverse when the 20-day moving average crosses below the 50-day moving average.

The risk management you use when trading a trend following strategy could be one where you lose 3% while looking to gain 10%. For example, you want to make $1,000 and you are willing to lose $300 on each trade.

If you trade 9-times, losing 6-times ($1,800) and winning 3-times ($3,000), you will wind up with a $1,200 profit. The key is to find a risk-reward profile that meets your trading goals. In this example, your reward versus risk rate is 3.33 to 1, and your profit factor is $120.

If you use a different type of strategy, where your winning percentage is higher than your losing percentage, then the amount you lose can be equal to the amount you gain. If you win 60% of the time and lose 40% of the time and you risk $100 on each trade, after 10-trades you will have a gross profit of $200.

As you are confident with the moving average indicator, then it’s time to move forward and learn other indicators such as Fibonacci, Bollinger bands, relative strength index and integrate those into your charts.

Cutting Your Losses and Letting your Profits Run

One important concept is letting your profits run while cutting your losses. This is especially important for trend following strategies. The risk management strategy you use should incorporate this concept by using a trailing stop loss. This is a dynamic stop loss technique that changes with the market. You can use a percent stop loss when designing a trailing stop or an absolute number. The goal is to hold on to your position until the market reverses. For example, if you purchase the EUR/USD with the goal of making 2% while only risking 1%, once the market rises 1%, you can move your stop loss up to make sure you do not lose the 1% you have as an unrealized gain. As the market climbs, you continue to move your stop loss up until the market reverses and hits your trailing stop loss. This will allow you to maximize your trade while catching a trend.

Note that not many brokers provide trailing stop loss. HQBroker allows traders to trade with trailing stop loss function.

How to Trade CFDs with Appropriate Risk Management

Prior to making a trade with real capital, you should paper trade to determine if your trading strategy can be successful. Another important risk management concept is to stick with your strategy. Novice traders will often exit positions early especially if they are losing money, not giving the strategy a chance to become unsuccessful. Additionally, it’s easy to become married to a trade, allowing the market to move against you passed your stop level, which can lead to the risk of ruin.

Another important feature of CFDs is that you are using leverage. Higher leverage equals to larger risk. For your trading strategy to become successful, you must know the leverage your broker provides and in particular, the instruments you are engaged with.

Day Trading Risk Management

Day trading is an activity where you plan to exit positions you take by the end of the day. Most day trading strategies are focused on entering and exiting a position intra-day. Before trading any forex pair or CFD, you should evaluate the historical daily ranges so you know how much you can expect to make or lose on any given day. For example, the historical range, from the daily high to the daily low, of crude oil prices over the past 3-years is $0.50 per barrel. Therefore if you are day trading crude oil you can evaluate a daily change based on historical data. Obviously, the volatility is higher for other instruments such as cryptocurrencies.

The risk management you use should be focused on exiting your positions with a profit or loss by the end of a trading day, as well as, figuring out a risk versus reward ratio that will fit the daily ranges of the product you are trading. Meaning, when you are day trading, you must have a daily limit for how much you can lose and although you want to squeeze the lemon in a profitable day, sometimes it’s not such a bad idea to limit your profit.

Additionally, you also want to incorporate slippage and commissions into your trading activities. Slippage is the amount of capital you generally lose by entering or exiting a trade. Commission also include the bid/offer spread your broker provides. If you are trading crude oil and the bid/offer spread is $0.02 per barrel and the slippage when you enter a trade is $0.01, then you need to subtract $0.03 from each trade when you design your trading strategy.

Summary

Risk management is an important concept and you should plan out the amount of the risk you are willing to take before initiating each trade. Your risk management style should be based on your financial goals, your risk tolerance and… your personality. Remember, you are paid to take a risk and the reward you achieve will be based on the risk you take. The more you risk the more reward you should expect and the less risk you take can make you a solid trader. You want to design a trading strategy that has a positive reward versus risk ratio and make sure you cut your losses and let your profits run. That’s the main goal.

Условия торговли CFD

Торгуйте CFD эффективно

Наши трейдеры CFD успешно используют гибкие и экономичные контракты CFD, которые охватывают большую долю мировых рынков. Исполнение ордеров CFD производится на нашей низко-латентной инфраструктуре, что обеспечивает оптимальные условия для торговли.

Маленькие контракты

Наши CFD доступны для контрактов малых размеров, чтобы дать трейдерам возможность создавать точные размеры ордеров для своих индивидуальных нужд. Наличие маленьких контрактов позволяет нашим клиентам позиционировать себя на рынке в соответствии с их ожиданиями.

Торгуйте с Forex

Контракты CFD доступны для торговли без необходимости заводить отдельный счет. Наши трейдеры легко могут создавать и реализовывать глобальные торговые стратегии, используя CFD и Forex с одного счета без каких-либо дополнительных требований.

Superior Trade Execution

Все ордера CFD производятся с такой же высокой скоростью, как на Forex и Metal с упором на оптимизированное ценообразование и быстрые сделки. Клиенты CFX Point также могут воспользоваться минимальным уровнем тейк профит (take profit) и стоп лосс (stop loss).

CFXpoint is owed and operated by KLDC Technical Systems LTD, Reg No. 90530, Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands MH 96960.

DISCLAIMER: This information is intended for investors outside the United States who are not US/Japanese citizens and residents. This website is intended for informational purposes only. This website is not directed at any jurisdiction and is not intended for any use that would be contrary to local law or regulation. The products described on this are not offered and may not be sold in the United States/Japan or to US/Japanese citizens and residents. The products described on “www.cfxpoint.com” are not offered and may not be sold for Spanish citizens and residents.

ПРЕДУПРЕЖДЕНИЕ О РИСКАХ: Торговля на Forex и CFD сопряжена с высокими рисками и, как следствие, может привести как к большим прибылям, так и крупным потерям. Не рекомендуется инвестировать больше, чем вы готовы потерять, так как потери могут превысить первоначальные инвестиции. Если вы не обладаете достаточным опытом в торговле, мы рекомендуем обратиться за независимой консультацией прежде чем инвестировать. Ознакомьтесь с полным Предупреждением и рисках.

Currency & CFD Trading

Most frequently asked questions

Spread: When trading CFDs, you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favor before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.

Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.

We set a price for a contract based on the underlying market, which you can buy or sell.

With each market, you are given a ‘buy’ and ‘sell’ price either side of the underlying market price. You can trade on the market to go up (known as ‘buying’ or ‘going long’), or you can trade on it to go down (known as ‘selling’ or ‘going short’).

Once you open your trade, you’ll receive a confirmation message to show that it has been accepted. Trades are occasionally rejected, but the vast majority go through without any problems. Check the details on your confirmation message carefully to make sure the trade is as you intended.

Your open trade will now appear in the ‘open positions’ pane in our trading platform. All the time, your position is open, you’ll be able to see your profit or loss by checking the profit/loss column.

When you decide to close your position and collect your profits, to do this, you sell the same number of contracts as you bought initially.

The simplest way of doing this is to bring up a ‘close position’ screen. When you click on ‘sell’, you’ll receive another confirmation to let you know that you’ve sold that number of contracts.

Unlike some other forms of trading, when it comes to CFDs traders using the Fortrade platform, traders can hedge their trades, which can be beneficial when it comes to limiting potential losses.

For example, let’s say that I currently have an open position on Dollar/Yen – I ‘went long’ buying the Dollar in the expectation that USD would strengthen against the Japanese currency. However, I’m now having second thoughts – not enough to make me want to close my trade, but sufficient doubt to make me slightly uncertain that my hoped-for currency strengthening will occur.

In other forms of trading, I would have two choices; close the trade now or keep the deal open and cope with the uncertainty. However, with a CFD, I can simultaneously open another Dollar/Yen position in which I short the Dollar – going the opposite way to my first trade, which is still open. Traders should keep in mind that CFDs can only be hedged using the Fortrade platform.

If the currency pair subsequently moves the other way to my original trade – with the Dollar falling against the Yen – I’ll still be able to salvage something from the situation, because my hedge will then take effect.

If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.

For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end, and the value of your physical shares starts to rise again.

Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.


CFD Trade Example

So, how exactly does one trade a CFD? Let’s take a look at an example of a CFD trade using the popularly traded ‘Germany 30’ index as an example;

In the following theoretical example, ‘Germany 30’ is currently trading at a level of 9610.5/9611.5, giving me the option of selling the German index at the 9610.5 level or buying at 9611.5. I decide to buy £5 of the ‘Germany 30’ at that 9611.5 level, and my nominal risk in this instance would be worked out as follows;

(Level I’m buying at x the amount I’m buying)

So, in this case, the nominal risk would be;

9611.5 x 5 = 48057.5

£48,057.50 is the maximum amount of money I would stand to lose if the ‘Germany 30’ dropped from its current 9611.5 level to zero.


CFDs and Leverage

As a form of trading involving leverage, instead of having to put down the cost of the trade-in its entirety (at 9611.5 x 5 that would cost £48,057.50, the same as my nominal risk) I only need to put in a small percentage of the overall value to initiate the trade. We work this out as a percentage of the nominal risk – if the margin is 1%, then 48,057.50/100 = 480.575. Therefore, rounding upwards by a penny, £480.58 is the amount needed to initiate the trade.

If, however, I had decided to sell £5 of ‘Germany 30’ instead of buying it, the price of my trade would be as follows;

9610.5 x 5 = £48,052.5

The amount I would need to put into my trade would, therefore, be 1% of that, meaning £480.53

Traders are advised to remember that increasing leverage increases risk.

CFD Trading Results

Going back to the scenario where I bought £5 rather than sold, if the ‘Germany 30’ subsequently moves up to a level of 9613.5/9614.5, and I decided that this would be a good point for me to exit the trade, I would work out the profit on my trade as follows; the amount I bought x the number of points that the trade has moved in my favor.

In this case, my profit would, therefore, be 5 x 2, meaning that I would make a profit of £10 on the trade.

Alternatively, had I sold £5 of the ‘Germany 30’ at the 9610.5 level and then closed the trade at that 9613.5/9614.5 level, my loss would be 5 x 4, seeing as the price of my closing trade would be four points higher than when I opened it. In this case, my loss on the trade would be £20.

If however, the ‘Germany 30’ fell from 9610.5/9611.5 to 9608.5/9609.5 – had I bought £5 of the ‘Germany 30’ at the original level my loss would be calculated as follows; the amount I bought x the number of points that the trade has moved against me.

In this instance, my loss would be 5 x 3, meaning that I would make a loss of £15. On the other hand, if I had sold £5 of ‘Germany 30’ at the original level, then my profit would be 5 x 1, giving me a profit of £5.

Forex swap is the overnight charge/credit amount for an open position.
The amount reflects the interest rate difference between the central banks (based on market rates and spreads) of the two assets involved.

Swaps are credited or debited once for each day of the week, with the exception of Wednesday, on which they are credited or debited 3 times their regular amount.

Swap charges are released on a weekly basis by the financial institutes which Fortrade works with, and are calculated and determined according to various risk management criteria and market conditions.

The swap premium is calculated in the following manner:

Pip Value (Depending On Trade Size) * swap rate in Pips * Number of Nights = Swap charge/credit

Forex Example:
You open a short position (Sell) on EUR/USD for 1 lot with an account based in USD:

1 Lot = 100,000
1 Pip Value = 10 USD
Swap Rate = -3.2839 Points (equivalent to 0.32839 Pips)
Number of Nights = 1
Swap Premium: 10 * 0.32839 * 1 = 3.2839 USD

CFDs Example:
You open a long position (Buy) on Crude oil for 1 lot (1,000 barrels) with an account based in USD:

Swap Rate = -0.3807
1 Cent Value = 10 USD
Number of Nights = 1
Swap Premium: 10 * -0.3807 * 1 = -3.807 USD

A trader has an open SHORT or SELL position of 1,000 Crude Oil Barrels.

The current contract closing quote is 45.50 (Bid)/45.54 (Ask), and the new contract quote is 46.50 (Bid)/46.54 (Ask).

The difference is +1 USD, i.e., the new contract is HIGHER than the old contract.

To rollover the open short position, Fortrade automatically closes the old contract at the ask price of (since the client has a SELL position, it will be closed in the ask price, which is 45.54), and simultaneously re-opens at the new contract bid price of 46.50.

In this example, the client is credited with the sum of 960 USD, reflecting the price difference between the two contracts. It means that the customer’s charge is equivalent to the spread of the Bid and the Ask (i.e., the new contract will be opened at the Bid price, which is 46.5).

The calculation is: (46.5 – 45.54) * 1,000 = 960 USD

(Old Contract Closing Ask Price – New Contract Opening Bid) * Amount = Rollover Charge/Credit)

If you do not wish to incur rollover adjustment costs, simply close any open positions before the scheduled rollover date. These dates may be found on the Rollover Rates page of our website. Clients are also advised of upcoming rollovers via notifications on the Fortrader trading platform.

Rollover rates are provided and updated directly to our website. To view the most recent rollovers and an annual schedule of dates for rollovers, please click here.

Please note, rollover charges/credits are also reflected inside the Swap column of our financial instruments’ Trading Conditions (in addition to an already existing Swap charges).

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading 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. Be Aware: You can lose all,
but not more than the balance of your Trading Account. These products may not be suitable for all clients therefore ensure you understand the risks and seek
independent advice. This material does not constitute an offer of, or solicitation for, a transaction in any financial instrument. Fortrade accepts no responsibility
for any use that may be made of the information and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of
this information, consequently any person acting on it does so entirely at their own risk.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country
or jurisdiction where such distribution or use would be contrary to local law or regulation.

When performing transactions in the OTC Forex market, the possibility of making a profit is inextricably linked with the risk of losses. Conducting transactions
can lead to the loss of part or all of the initial investment. Before commencing operations, make sure you understand the risks involved and have sufficient skills to invest.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country
or jurisdiction where such distribution or use would be contrary to local law or regulation.

CFDs and margin FX are leveraged products that carry a high level of risk to your capital. You should only trade with money you can afford to lose. Be Aware: You can lose all, but not more than the balance of your Trading Account. You do not own, or have any rights to, the underlying assets. Past performance is no guarantee of future performance. This information is intended to be general in nature and is not financial product advice. Any advice contained on this website or provided to you by Fort Securities Australia Pty Ltd is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. We encourage you to obtain independent financial advice and consider our Financial Services Guide (FSG) and Product Disclosure Statement (PDS) before deciding to enter into or obtain any financial products issued by us.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Be Aware: You can lose all, but not more than the balance of your Trading Account. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice. This material does not constitute an offer of, or solicitation for, a transaction in any financial instrument. Fortrade accepts no responsibility for any use that may be made of the information and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information, consequently any person acting on it does so entirely at their own risk.

CFD trading is only available in provinces in which Fortrade Canada Limited is authorised, which include British Columbia and Ontario ONLY.

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