Placing CFD Stop-losses Proficiently

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You are well-advised to make the protection of your account balance your top priority when you trade CFDs. You can accomplish this objective by either devising or attaining a well-proven money management strategy. For instance, when developing such a policy, you could base it on the following four popular stop-loss techniques that are now described.

Chart Stop

You can identify good locations for stop-losses by studying the trading charts of underlying asset upon which you intend to base your CFDs together with technical analysis. The following chart displays a bullish stochastic crossover for a CFD that is structured on a currency pair. Under such circumstances, you should position your stop-loss about 20 to 50 pips below the most recent low, as shown on the diagram.

 

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Equity Stop

You will discover that the equity stop is the simplest type of stop-loss. If you decide to use one, when trading CFDs, then you will be restricted your risk per trade to just a preselected proportion of your total equity.

Most experts recommend that you should limit your risk per CFD to a maximum of 2% of your total equity.  For instance, imagine you have a balance of $10,000 then you should aim to risk a maximum of $200 per trade. Envisage that each point equals to $1. Consequently, you could place your stop about 200 points away from the opening value of your underlying asset and still comply with your risk and money management strategy.

However, if you use this stop method then you must realize that you are basing your strategy on your own internal risk strategy. This is opposed to defining a stop-loss that is logically deduced by identifying key technical features concerning price action.

 

Volatility Stop

If you prefer to utilize a more sophisticated stop-loss then you could consider using one that is based on volatility as opposed to price. You will then provide your CFD with additional room to expand during volatile times when price could be fluctuating widely. This will help prevent your trade from being stopped-out as the result of increased noise levels. In addition, should volatility decrease then the size of your stop-loss will decline as well by reducing your risk exposure.

Many professional traders utilize the Bollinger Bands to help them monitor volatility. This technical indicator is one of the most popular methods of achieving this task and tracks price variance by utilizing standard deviation. When volatility is high, then the distance between the lower and upper Bollinger Bands increases as demonstrated in the next diagram.

In this case, the volatility stop-loss was placed below the blue line so that the distance it was below the opening price of your CFD equaled the gap size between the lower and middle Bollinger Bands. As the size of the stop-loss may be quite large under volatile trading conditions, you may well need to invest a smaller amount in your CFD with the intent of complying with your money management strategy of restricting your risk to a maximum of 2% per trade.

 

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The next diagram shows trading conditions during more stable times when volatility levels are much lower. You will now notice that the distance between the upper and lower Bollinger Bands has shrunk quite considerably. You can now position your volatility stop a distance below the opening value of your CFD so that it equals the gap size between the lower and middle Bollinger bands.

If you do so, you will find that the size of your stop-loss is now much smaller because volatility levels have dropped. Consequently, you could risk a larger deposit when activating your CFD and still comply with your 2% risk strategy.

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Margin Stop

You will find that the oddest type of stop-loss is the Margin one although it can be very effective if used properly and with skill. To understand how it works, you must be aware of the following important feature of CFD trading.

Your CFD broker can automatically closed down all of your open positions by issuing margin calls should your trading activities go out of control. Consequently, you are never in any real danger of attaining a negative account balance.

If you decide to use this type of money management strategy then you must divide your total equity into ten equal parts. Next, you must fund your trading account with one tenth of your total equity and leave the rest in your own bank account.

When you open your next CFD, you must make a deposit so that a margin call will be made whenever your balance plunges to zero. Consequently, you should choose the most appropriate amount to risk so that your CFD has ample room to breathe and prosper

Should a margin call close your first CFD, then you should repeat this procedure using the next one tenth of your equity balance. This is a strange way to trade CFDs but some experts have achieved good success by using it. As always, you must again persevere with your stop-loss selection in order to provide yourself with the optimum chances of generating a successful trading strategy.

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