money management in cfd and forex trading

CFD trading is by its very nature a tricky business. Reading unpredictable markets is awkward and inconsistent at the best of times, but your problems become multiplied manifold when you introduce the degree of volatility involved in many CFD markets, along with the inflated impact of leverage on transaction sizes and potential losses. This results in numerous trades running both in positive and negative directions, which makes managing your capital effectively of paramount concern.  In fact, so critical is money management to the overall trading puzzle that it can be the difference between trading survival and failure.

Fortunately, there are a few solid money management tips you can bear in mind to make sure your portfolio is managed as effectively as it can be, and to ring-fence your capital as far as possible from risk.

Apportioning Your Funds

The first step to managing your trading resources lies in apportioning your funds between reserve and investment capital.  From your capital pot, it’s important to distinguish between how much can be traded and how much should be kept in reserve.  While the ratio determines the level of exposure you can take in the markets and as a result the degree of aggression you can afford to exercise, it’s imperative to keep considerably more in reserve at any one time than the amounts you have available for actively playing the markets, in order to cover any losses.  The less of a reserve you hold back, the less stable your foundations, and the more likely you are to get caught out with a devastating margin call-induced collapse. While it might seem pointless to keep a large buffer, the protection and rigidity this adds to your portfolio should not be underestimated.

Setting Daily Investment Limits

At the same time, you need to establish how much capital you are freeing up for investment, and how that works as a daily calculation.  Knowing ahead of time how much you can afford to invest in total gives a frame of reference for deciding how heavily to back each position. This eliminates much of the guesswork when it comes to trading in live play, and affords a greater degree of control over the flow of capital into and out of positions.

Reviewing And Assessing Performance

You should take care not to underestimate the importance of review in capital management.  When setting targets and objectives, you should be sure to review performance at a later date, in order to determine whether or not your financial management strategies are working as effectively as they can.  Reviewing and assessing your actual performance against your forecasting will enable you to tweak your capital management formula in order to derive the maximum value from your available resources.

Trading like a professional requires professional capital management. While that means you need to strike a balance between aggression and conservatism, it shouldn’t necessarily get in the way of your day-to-day trading activities.  So long as you take care to manage your finances within the trading plan you have set out, you can benefit from the safety of solidifying and securing your capital without hampering your drive for profits too greatly, unlocking the holy grail of defensive CFD trading.

Patience Pays

One of the most invaluable attributes a successful can possess is the virtue of patience. CFD trading in particular is a game of holding your nerve – after all, there are no hints or nudges in the right direction, so timing and knowing when to move and when to hold are all vital pieces of the successful trading puzzle.  Just one of many of the desired skills a successful trader should have mastered, patience and timing is coupled with ruthless decision-making on the flip side as a central component to successfully enacting the strategy running profits and cutting losses.  So how can you bolster your patience and timing skills, and how should these interact with your other trading behaviours?

Patience In Profit, Decision In Loss

There is an oft-spoken mantra that traders should take care to follow to ensure they get the most from their trading activities. Profits must always be allowed to run their full course, while losses must be cut at the earliest possible opportunity.  On the upside, that means having the patience to simply sit back and do nothing, until it becomes clear that your position has peaked. The earlier you take your profit, the harder to achieve your trading success will become. While it sounds counterintuitive, quick profits are not the answer. Long, sweeping price curves provide the holy grail as far as trading profits are concerned, so it pays to have the patience and resolve to spot, and ride out these opportunities.

By contrast, patience on the downside can actually be a negative.  If a position is losing money, the natural tendency is for traders to give it a chance, and actually extend their patience beyond normal limits.  This is completely the wrong approach – as soon as a position looks as though it might yield a loss, you need to get out and look elsewhere.  Thus, patience in profit is the really key temperament you need to succeed.

Squeezing The Positive

When the markets move in your favour, and you’ve finally hit on a good thing, you really need to make the most of it and squeeze every last drop of juice from the position.  If you don’t, chances are you’ll get caught out by damaging wayward positions over time.  It’s critical to milk successful positions for everything you can, and that’s where patience really can pay for the CFD trader. Try to distance yourself from the temptation of cutting early and keep a close watch on your position – whenever you see the first signs of resistance, you can start to contemplate getting out, but until that point you must hold your nerve and sit on the fence if you want to make the most from your capital.

While its often easier said than done, patience really is key for traders looking to make the most from their trading capital. Leaving a position to fully mature can be hard, especially when you’re fuelled with the fear of a sudden reversal, but the rewards for those that execute their timing with finesse and resolve make it more than worthwhile stress.