E Risk Management In CFD Trading

In CFD trading, risk management refers to determining how much funds are to be put into each trade to make sure that you will easily survive losing trade and will be able to go on with trading in order to get returns. To understand it more clearly, let’s take an imaginary trading system as an example. Say in your system you may have found that during backtesting, your system generates x% return, a maximum drawdown of y%, and highest losing trades in a row of z.

Assuming that your system is performing, if you follow the trading system with same set risk management rules, this is expected to generate the same kind of output in real trading. And if you face a year that has come up with y% drawdown, or z losing trades in a row, then the right risk management will help you to survive in the drawdown and get a return for that particular period.

Going for CFD trading without proper risk management can expose you to unnecessary risk. For example, if you put a considerable portion of your float into each trade without using risk management, this can cost you all the float and you can discover that you are no longer in a position to continue trading, means your trades are not going to generate any profit for you. This can force you out of the market that definitely you don’t want to see.

Now we will have a look at the fixed dollar trade size model; a very common risk management method so that you can have some idea about how the money management works in trading. There are many other risk management methods available out there. But as an illustration, here we will give focus on this particular method.

CFD Position Sizing: Fixed Dollar Trade Size Model

Let’s have a look at how to consider CFD position sizing when you are trading CFDs. For this CFD risk management model case study, an equal amount of capital is used for each trade. For example, if you have a leveraged float worth of $100 000, you may want to put the same amount of funds into each of your trades, say $x. In order to figure out how many CFDs to buy or sell when entering the trade, you would divide $x by the price of the CFD. Say if the last traded price of the CFD was $7.50, you need to divide $x with 7.5 to determine how many CFDs you will buy. You will have to go for a different calculation in order to determine the risk that is involved in the trade.

1 2
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.