CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
January 02, 2019
Risk is the most important concept surrounding a trading strategy. More important than your reasoning for entering a trade, the concept of the risk needs to be evaluated in advance to trade successfully.
You can define risk as the amount of capital you plan to lose when you trade. You should allocate risk to a trading strategy as well as each trade.
Risk management is a process that determine how much money you plan to risk making the money you want. Trading without understanding that you can lose money is a faulty idea. You will lose money on trades throughout your investing career, but if you make more than you lose your trading will be considered a success.
There are several parts of risk management. You should breakdown your risk into several parts. First, you need to determine how much money you plan to risk on investing. You should only invest discretionary money or fund that you do not need for several years. You should avoid using money that you need immediately such as your rent money or the money you use for food. Your goal is to invest money and generate a reasonable return. Remember, investing is not gambling, you are not trying to triple or quadruple your money within a short-period.
A reasonable goal might be to earn 20% on your capital. For example, if you have 10,000 dollar it would be reasonable to earn $2,000. If this is the case, the question is what would you be willing to lose to make this amount? Generally, a good rule of thumb is you should be willing to lose 50% of what you are trying to make. So, if you want to make $2,000 over a year on $10,000, you should be willing to lose $1,000.
The goal of your risk management plan is to have one for your entire portfolio as well as each strategy and every trade. You might have multiple trading strategies and each strategy might have a different risk management technique. For example, a trend following strategy might experience larger losses and larger gains then a mean reversion trading strategy. No all trading strategies need to have the same risk management profile.
Your risk management needs to provide you with a goal on each trade. Before you enter a trade, you should have an idea of where you will take profit and how much you are willing to lose. This means that you need to have a take profit level and a stop loss price on the Vestle platform. This will allow you to determine if you risk versus reward conforms to your risk management profile.
Remember before you start to trade you need to have a specific idea of how much you are willing to lose to achieve your financial goals. Each trade strategy should have its own risk management plan. Before you execute a trade, you should have a stop loss level as well as a take profit price.