Online trading can be very exciting and we definitely recommend celebrating your profits but keep in mind that there is always risk in trading. Understanding CFD trading and how to trade them is relatively straightforward. An important factor for your success is not only this understanding, but also your risk management and how you cope with the ups and downs as a trader. This should not be underrated. Coping with the psychological impact of large wins or losses is a key component in trading.
Limiting Trading Risk
Managing risk is at the root of trading, and how you go about it can make or break you as a trader. To limit risk, you can:
- Use the right equipment – a reliable computer, a fast and reliable internet connection, suitable trading platforms, etc.
- Use a protective stop loss – limiting your loss on each trade is an excellent way to preserve your trading capital. That said, it has to be balanced with giving the trade room to move. If you set your stop loss too tight, you’ll have a harder time making a profit (conversely, if your stops are too loose, you’ll also have a tough time making a profit). The only way to figure out the “best” stop levels for your trading plan is through testing and optimization.
- Use appropriate position sizing – sure, trading in big lots gives us the chance to make much more money, but we can lose a lot more money that way too. If you are new to the market, give it time to prove itself – under a variety of conditions – before increasing your position size.
- Do not over-invest in one particular asset – Try to spread your investments, spot opportunities and use stop-loss when trading.
Using the profit call and stop-loss
The trading program itself has various options for trading safely and limiting your risk. Two of these options are a stop loss and a profit call.
The stop-loss is a limit you can set for every trade you make in order to protect yourself. The stop-loss will automatically close your position when the limit has reached so it will ensure you won’t exceed your personal limit whenever you are not monitoring your trade.
The profit call is the limit you set when you want your position to close at a certain profit. Setting the profit call ensures that your profit is protected when it as reached your desired level. The position will be closed so your profit will be ensured.
In the illustration below you can see how convenient the profit call and stop-loss can be set for the trade.
Brokers will allow traders to use a demo account prior to using real money. This is a great opportunity to get to know the platform and pratice trading in general. Traders may trade using real underlying assets – and in real time – yet without the risk of losing money.
Demo trading is the best way to get experience, yet is often overlooked. There are some very good things to learn from your time demo trading. You will learn the software an platform inside out in the matter of just a few trades. This is a good way to eliminate user error on your part. Check out our broker section to see what brokers offer a free demo account.