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Understanding the Use of Money Management in CFD Trading

What is money management in trading CFDs? You might think that it is something very easy to do and implement, but in fact, it is a bit more complicated than that. Money management is how you invest, save and budget your income without taking up loans or getting out of budget. It is not just applicable to CFD trading but in your day-to-day life too. Be it for your personal capacities or your investment endeavors, you need to have the right money management skill.

Money Management Strategy

But money management is much more than keeping your hard-earned money safe. It also requires discipline and the right knowledge of the basic elements of the market for long-term profits. One of the main reasons why traders fail in the market is probably inexperience and lack of knowledge. If you neglect emotional trading and money management principles, it will increase your risk and then decrease your profits. Forex in CFD is extremely volatile and inherent risk lies within. But having the right money management technique at hand when entering the market, keeps the risk at a minimum.

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Risk Management Strategy

When entering a trade in CFD, you have to maintain a high understanding of the risk that you are about to partake in, especially if you are using leverage and margin. Although there are risks associated with trading, there are also a number of ways to minimize these risks. Here are some principles to minimize risks and let your profits run.

  • Using position sizing
  • Recognizing trading risks
  • Analyzing and evaluating trading risks
  • Establishing solution to minimize trading risks
  • Applying and managing the solution on a regular basis

There are a couple of ways to approach position sizing. Complex or not, as long as the approach is well-suited to the trading platform. This is the perfect way of managing both winning and losing trades. These three models need to be followed;

Fixed Lot Size

It is a good way for beginners to start off their trading CFDs career. By doing so, traders will be trading using the same position size, most appropriate if it is a small size. There are a lot of things that can change throughout the trade, based on the increase or decrease in the size of the amount throughout the trading period. This account size plays a very important role if you are still starting out and keeping the leverage small can help you steady and grow your potential profits.

Equity Percent

Equity Percent bases its idea on the position size out of the percentage change acquired in equity. It is highly advisable to pinpoint the percentage of equity of the position since this will allow growth of equity related to the position size. It is always easy to lift the percentage of equity that is being utilized in a trade but it’s important to note that the higher the potential profit, the higher the risk that you should take. What is the safest percentage of equity in your trades? The safest percentage of equity for new traders is 1% to 2% which is equivalent to a 50:1 leverage ratio.