How to Develop a Risk Management Strategy for CFD Trading in Singapore

Singapore presents excellent opportunities in CFD trading. But, as risk always goes hand-in-hand with high returns, such business positions demand a good, well-planned risk management policy for success. An orchestrated strategy will ensure all your capital is protected and you are able to take advantage of a market opportunity that won’t do any damage to you. Here is how to plan an effective risk management strategy for CFD Trading in Singapore.

The first thing to do is to determine your risk tolerance. This simply is your comfort level at knowing how much of all your capital you are willing to put at risk on any given trade. For example, if you have a $10,000 trading account and you can stomach risking 2% of your capital on every trade, your maximum risk will be $200 on every single trade. This definition of your risk tolerance will keep you disciplined and away from doing emotional decision-making when things do not go according to plan. In Singapore CFD trading, for which the leveraging of profits and losses could be extreme, clear-cut boundaries should also be defined beforehand.

Position Sizing  refers to the capital amount committed to a particular trade. Since bigger positions have more potential for losses, it’s in your best interest to balance your trades according to your risk profile. There’s a rule of thumb to be risking no more than 1-2% of your capital on any single trade. This lets you weather a series of losing trades without significantly affecting your overall account balance. Position sizing ensures that one bad trade won’t wipe out your portfolio.

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In Singapore, stop-loss orders are an integral part of the CFD trader’s risk management. That is to say it automatically closes a position, limits the loss to if the market moves against you, by closing it when it hits a certain level. Presumably you have entered a CFD at $100 and might set it to close at $95. Should the market hit the stop price of $95, the position is automatically closed, and your loss will be capped at $5 per share. The use of stop-loss orders allows you to control your risk exposure without having to be glued to the markets every hour of every day, thereby minimizing emotional decision making during times of increased volatility.

The third strategy is diversification. The same way as would make no sense if you were to put all your capital in one stock, spreading that same risk across multiple assets would also not make sense. In CFD trading, diversification could be as in trading more than one asset class, whether it be in stocks or commodities or even within a forex market. It reduces the effect of one losing trade and seeks to balance the risks within your overall portfolio.

Another critical item to be controlled is leverage. It allows you a way of trading in more significant lot sizes than your capital would otherwise allow, but, due to leverage, potential profits can run higher as well as potential losses. Try starting with lower leverage and then increasing from there as you learn how its application impacts your trading. Leverage can quickly get out of control and infuse losses greater than one might have suffered without such leverage, so use it carefully.

Last, monitor and hone your strategy periodically. The markets are not stable, and a strategy that serves you well today may need to be tweaked tomorrow. The use of a trading journal helps you to follow your trades and reflect on the quality of your decisions, making room for the refining of your approach over time.

An efficient structured risk management strategy for CFD trading in Singapore includes definition of risk tolerance, size control of the taken positions, stop-loss orders, diversification of assets, and appropriate leverage management. In this way, a disciplined approach will provide a protective cover of your capital and increase the chances of long-term success.