By definition, a “money management technique” is a procedure that helps traders take advantage of opportunities while minimizing risks in financial trading or investments. Traders should generally do this before trades are opened to ensure proper risk assessment and reduce exposure to losses. Proper money management can increase profits while maintaining financial security.
Money management is essential for any investment, but it’s especially significant when trading currencies. It allows traders to keep their emotions in check and make rational decisions. Here are some money management techniques for CFD traders in the UK.
Use a demo account
When you’re just starting as a trader, it can be helpful to use a demo account with no loss limits so you don’t experience any financial consequences if you happen to lose trades. This means that you can concentrate on your technical analysis without worrying about the risks involved until you feel confident enough in what you’re doing.
Use stop-loss orders
Once money management techniques become second nature, though, this won’t be necessary. Most traders are guilty of chasing their losses at some point, but this is one of the worst mistakes you can make. It will only set you back further and cause more stress. Accept that you’re going to lose trades from time to time, but don’t hold onto your losses for too long either – they must be cut at some point before they turn into winners.
The golden rule with stop-loss orders is to work 90% of the time. If they aren’t working 90% of the time, you need to re-think your trade ideas because something doesn’t sound right.
Use an exit strategy.
An “exit strategy” is an alternative strategy for traders who would like to control losses before getting stopped out is called an “exit strategy”. With this strategy, after opening a trade and calculating risk exposure, traders close positions when specific indicators are triggered before being stopped by the market. Traders exit trades with small losses while keeping significant gains intact.
Use margin calls
Traders who are not concerned about their positions getting stopped out on high volatility can use margin calls as an effective strategy. The margin call here refers to the situation where the trader must meet their due margin requirement by depositing additional funds if there are insufficient funds available for a trade to meet the required margin. This ensures that the trader stays in a position, even if it starts going against them until their stop-loss is hit or they reach breakeven.
Only risk 1% of your total capital per trade
Every trader risks 1% of their overall capital per trade – this means that if you have £1k in your trading account, you should risk £10 per trade. The idea is simple – don’t risk more than 1% of your total funds, and never chase a loss above this amount. If you have a string of losses that add up to more than 1%, then start again from the beginning because there’s something fundamental that you’re not doing right in your approach, which is causing you to lose money in this way.
Stick to your plan
It’s also essential to stick to a plan. Every trader has their unique style in technical analysis, but they must have a plan, so they know what they’ll do in different market conditions. This means having clearly defined entry points, stop loss levels and profit targets on all open trades. Having proper money management techniques in place will help to keep emotions out of the picture and allow you to trade rationally.
In conclusion
New and experienced CFD traders can better protect themselves from financial ruin while maximizing profits by using these two simple money management techniques. Having a plan is important because it helps traders to formulate their ideas clearly and know where they stand at all times. It also prevents them from making mistakes as often as they otherwise would if they were throwing things together without any thought or preparation. New traders are advised to use a reputable online broker like Saxo Bank.