If you want to trade CFDs well, you must understand how your emotions affect your trading decisions. This article provides three practical techniques to help you manage your emotions when trading CFDs in Asia.
Use stop losses
The goal of every investor and trader should be to make money and preserve capital. This means buying low and selling high (or vice versa). However, if you guess where the price of an asset is headed, there’s always a chance that you’ll imagine wrong – which makes it impossible for you to make any money.
Since you can’t always win, your positions must be limited to the amount of capital that you’re willing to risk. Stop losses help traders manage their downside risk. They also protect profits because they guarantee that traders won’t sell anything for less than they paid for it. For example, let’s say you buy 100 shares of IBM at $100 with a stop-loss order set at $90. The price plummets to $80, and your position drops in value.
Suddenly, selling is beautiful because you can get rid of that losing trade and maybe even try to unload it on another trader who doesn’t know what’s coming. Let’s hope this person pays more than $90 per share! If they do, all is well: You’ll make a little money and keep the rest – which is great news unless you consider what would happen if IBM closed its doors tomorrow and went out of business.
If IBM goes bankrupt, every stockholder will be scrambling to dump their shares as quickly as possible for any price they can get. With so many sellers on the market, you probably won’t be able to sell your position even if you offered it at a 90% discount! But what about your stop-loss order? Selling IBM now would mean that you’d have to take an even more significant loss because now it would only be worth $80 per share instead of $100.
If you’re willing to risk losing more money in case of bankruptcy, by all means, keep your stop loss where it is. If not, then change your stop loss to $95, guarantee that no matter how bad things turn out for IBM (and everyone else who invested), you’ll still break even and secure whatever profits you’ve already made.
Set take profit targets.
The problem with not setting take profit targets is that traders are waiting around for profits to come to them – which isn’t how trading works! If your goal is to make money in CFD trading in Asia, there’s no point in waiting around hoping that the big score will fall into your lap. Instead, use take profit orders so that when certain market conditions are met (like a share price of $105), you’ll automatically be cashed out and realize your gains while they’re still there.
Use stop limits
Stop limits are similar to stop losses only; instead of closing an entire position when the price drops below a certain level, traders close only the number of contracts specified by the stop limit. With IBM again as our example:
You buy 10 CFD contracts of 100 lots each for $100/share with a stop-loss order set at $90/share and no price target. You don’t lose anything if the price suddenly drops to $120 – but what about when it starts dropping lower? Let’s hope it closes above your stop loss because if not, you could lose more money every day. That might be OK if the market was moving in your favor, but if it isn’t, you could be digging yourself into a deeper hole with every tick down.
Trading can be emotionally exhausting, and new traders should always use a reputable online broker like Saxo Bank. Trade on the Saxo demo account and learn to handle your emotions while trading. For more information on Saxo Bank, visit the website here.