Exercising good money management might seem to be a prerequisite for success in any form of trading not just contract for difference, but it is actually something that many novice investors ignore and many experienced traders lose sight of over time.
As there is no known form of trading that doesn’t carry an element of risk, managing money is a basic element in becoming involved, and although technical analysis and other tools can help make informed decisions, knowing every detail of funds and finances is the real key to winning.
A good trading system is something of a holy grail but it is also in reach of anyone, as experience and skill can combine to create a personal approach that fits individual aims and works to best outcomes. Of course, no system of rules and methodologies will result in guaranteed success, but over time a good trading system will produce results. However, even successful trades might not lead to overall profitability if there is a lack of discipline when it comes to managing money.
The reason for this is quite simple — if average losses outweigh average winning trades then a negative outcome is the result, and that’s even before trading costs are factored in. However, the opposite is also true, because even if a trader is wrong more often than they are right when choosing positions, careful money management can lead to a situation where an overall profit is still made.
Breaking self-imposed rules is all too easy and this simple lack of discipline is what causes many traders to move from an overall profitable situation into one of making a loss. By making a plan and sticking to it, not only is ’emotionless trading’ possible, but results can be quantified and analyzed in order to make changes and tweaks to optimize performance.
Discipline in terms of trading comes in many forms, and for CFDs this can often be most influential in a few areas, of which money management is an important one. As a leveraged product contract for difference offers investors a chance to take positions that they might not otherwise be able to fund, traders must also be aware that it also leaves them open to certain risks they might not otherwise encounter. This is definitely an aspect where strict money management discipline must be part of the overarching trading strategy, as margin calls can undo months of profitable work and, in the worst cases, deal a crippling economic blow.
Overextending a trading plan can involve more than simply using leverage advantages incorrectly. Another obvious cause is overtrading, such as having too many positions held open at any one time or overextending by taking positions in too many different markets. Each of these failings can seem attractive options in the first place, but the ‘hands on’ nature of CFD trading, especially on fast-moving markets such as Forex or crypto, can quickly get out of control if too many trades are being made at the same time.
One way in which money management can be applied successfully to CFD trades is by trying to make sure that losses from using stop loss orders are always less than gains from running positions. This might sound obvious but it is another aspect of managing an open portfolio that some traders can struggle with, especially those who are new to intraday trading methods.
Utilizing leverage is a great way to take positions that might not otherwise be feasible, but it isn’t the way to overnight success in the vast majority of cases. What is essentially using borrowed money to control bigger positions than available funds might otherwise allow, always runs the risk of larger losses too, so the aim of a well thought out trading plan that uses leverage to the best advantage will be to make small gains that compound on themselves as time goes on.
Risk management isn’t that different from money management but it isn’t the same either. Taking a safety-first approach by using stop losses is one of the things that draws many traders to CFDs, but risk is always a consideration even then. Money management would include ideas such as never risking more than a certain amount of available funds on each trade and adjusting trade size to perceived risk.
Of course, some markets are riskier than others, and that’s where research and data come into the picture in far greater detail. Simply dipping into a market and taking positions on hunches is a certain route to failure when using CFDs. Taking the time to research price movements and to predict trends is the only way that risk can be truly minimized to acceptable levels.
Profitable CFD trading
Any good trader will always utilize money management as part of a trading plan and this only works if it is then adhered to at all times. Balancing risk and reward is only one aspect to overall profitability, as other factors such as understanding the costs involved in holding trades open for certain times can be crucial when it comes to the final profit/loss tally.
It might seem obvious to state it clearly, but successful trading is by its very nature defined in the act of making more money than is lost. The trick is to understand that this is clearly different from winning or losing individual trades and has everything to do with the overall money management strategy that is in place.