Leverage And CFD Trading

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Within the financial markets, Contracts for Difference (CFDs) are considered to provide powerful and impressive leverage facilities. As such, this article has been produced in order to introduce and explain techniques that can help you acquire significant profits by exploiting this exciting feature. In addition, the risks of adopting such a strategy will be identified as well as solutions that you can deploy in order to minimize their impacts.

 

The Power of Leverage

You will discover that one of the primary advantages of CFD trading is that it provides you access to the power of leveraging. For example, imagine that you are utilizing leverage of 100:1.  This means that an initial deposit of $1,000 would permit you to trade currency positions as large as $100,000. This aspect implies that by implementing leverage wisely, you will be able to acquire much higher levels of profit than you would be if you were restricted to just your own limited cash resources.

However, you must adopt extreme caution when using leverage because excessive use can lead to overtrading and exposing your account balance to serious losses. How can you best prevent such problems? You can do so by designing and utilizing a sound and well-tested risk and money management strategy that will guarantee that you will never overtrade by subjecting your account balance to high levels of risk.

You must also teach yourself to control dangerous emotions such as greed so that they do not influence the quality of your trading decisions. Unfortunately, CFD trading can easily seduce you in to allowing this to happen because of its large daily turnover can readily confuse your mindset by making you undertake unrealistically large gambles.

 

Important CFD Risks

Consequently, although there are significant benefits to trading CFDs, you must not ignore or dismiss lightly the hidden risks associated with this type of investing. In contrast, if you acquire an extensive appreciation of the lurking dangers then you can prepare yourself to counter them better by implementing appropriate strategies. The following list identifies a number of important CFD risks:

  1. Constructing CFDs using unfamiliar assets.
  1. Exposing your account balance to excessive risks by overtrading.
  1. Not understanding the negative impacts of leverage.
  1. Activating CFDs by trading against the prevailing trend.
  1. Succumbing to greed after experiencing a bout of consecutive wins.

 

The Danger of Leveraging

In addition, you must be aware that CFD trading possesses a very dynamic environment that is capable of generating periods of high volatility. Consequently, the combined high levels of volatility and leverage can produce very dangerous situations that can readily induce you into overtrading if you do not exhibit caution at all times.

In fact, margin calls and the misuse of leverage are two of the prime reasons why so many beginners fail at CFD trading by losing their entire initial equities in the process.  If you do not ensure that your risk levels per trade are well-restricted under such conditions, then you could experience an increased exposure to margin calls. You must neutralize this problem by deploying a well-constructed risk and money management strategy.

 

Finding Solutions

Fundamentally, you must restrict the percentage of your equity that you will risk per position. How can you determine what is a good risk level? To answer this question, consider the following example. You need to realize that there is a significant difference in exposing 2% of your entire account balance when trading CFDs than 10% of it. For example, if you wager only 2% then you would squander only 17% of your total account balance if you suffered ten consecutive losses. Under identical circumstances, you would endure losses of over 66%, if you staked 10% per position.

After analyzing the above, you can deduce that deploying lower risk levels per position will definitely assist you in minimizing margin calls as well as producing maximum protection for your account balance.  You should also now begin to understand why so many experts stress the importance of risking a maximum of 2% of your total equity per trade.

 

Adopting the Right Mindset

After you have devised or acquire a strategy to help you trade CFDs more effectively, one of your next objectives is attaining a very good appreciation of the theory of money management because this knowledge will be vitally important in defining just how an effective trader you will eventually become. No matter how good the quality of results your strategy produces, it can still be significantly enhanced by incorporating a proven money management strategy into it.

You can use your money management strategy as a technique to assist you in evaluating a sensible percentage of your total account balance that you should wager per trade, as defined above. For instance, if you were to expose too much per trade than you may not acquire the maximum potential returns that your strategy could be capable to generating if your positions are constantly recording losses.

After you have produced a proven money management strategy, then you should always operate it in compliance the following revered maxim which advises: ‘do not expose too large a percentage of your equity on any one trade’. If you adhere to this recommendation, then you will increase your ability significantly to progress your CFD trading knowledge and skills in small stages of increasing risk whilst providing your account balance with optimum protection.

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