Diversification also works with CFDs

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In view of such a realisation, is it advisable to pay attention to risk minimisation at all? Absolutely! Especially with CFDs, the aim must be to reduce risks. No trader can do anything against the market. All the more important is a consistently implemented security strategy.

An important step is CFD trading with the order supplements mentioned above. On the other hand, diversification is also a possible lever for contracts for difference in order to prevent losses from getting out of hand. Background: Diversification as an investment concept relies on the fact that certain sectors and markets do not appear overrepresented in the portfolio.

Such a circumstance is also referred to as cluster risk. The best example is cryptocurrencies. The latter experienced a massive run from January 2017 until shortly before the end of the year. Some of the cryptocoins have risen several thousand percent. Forecasts were already predicting up to USD 100,000 for bitcoin, for example. Then, at the end of 2017, the big bang: investors exited their positions - the value collapsed. This development was not limited to one cryptocurrency. Many coins - like:

  •     Ethereum
  •     Litecoin
  •     Tether

were dragged into the abyss with them. Traders who bet exclusively on one market are agglomerating risks. And should not be surprised when massive losses occur.

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Use money management

Due to the leverage effect, beginners should focus on minimising losses or preserving capital as the most important goal. CFD traders with MT5 can influence the potential risk to a large extent themselves. In no case should all bets be placed on one card when trading. Money management allows traders to set the maximum loss on a trade. The amount of loss should always be set in relation to the total portfolio volume. In this way, the risk can be limited to the amount invested.

At first glance, a very simple concept. In practice, however, it is sometimes not so easy to implement. For example, how high must the bankroll be if a position of 100 euros is taken? What is missing as important information: How high is the margin - i.e. the sum of the capital that the trader moves.

In the end, the risk is to be confronted with a margin call. It can happen that even 1,000 euros are not enough. Beginners in particular are faced with the question of what money management looks like in practice.

Basically, this consists of three steps

  •     Calculate the trading capital
  •     Determining the risk share
  •     Implementing money management

The calculation of the trading capital takes into account which assets are not tied up and do not flow into long-term asset accumulation. Remember: CFDs are speculative financial derivatives. With 20,000 euros - if 15 percent reserve is to remain - there are still 17,000 euros. This is used to calculate how large the trading capital can be by means of a discount factor.

Tip: The trading capital is divided into small "slices". Each slice represents a loss that the capital can safely bear. Common practice here is to work according to the 1 percent rule. With a total capital of 2,000 euros, this means 20 euros.