In some cases, the possibility of a substantial loss may be high, although on the other hand there may be the potential for large gains. So before you open any position, it’s important to assess the level of risk involved and decide whether you feel comfortable.
Your perception of risk
We all have our own views and feelings about risk. For example, a CFD trade on a new and undiscovered company’s stock might feel like an exciting opportunity to one person, while another would regard it as too dangerous and stressful.
On the other hand, buying shares in a stable blue-chip company might seem like a secure choice to some people, while others could be put off by the long-term nature of the investment and the relatively low potential returns.
So an opportunity that appeals to somebody else may not necessarily be right for you, and vice versa.
How much should you risk?
Choosing how much to risk is very dependent on your personal circumstances. Some guidance will advise you not to risk more than 1% of your dealing capital (the total amount of money you can dedicate to trading) per position, while other sources recommend up to 10%.
If you choose to risk 10% or more per trade, bear in mind that any losses could have a huge effect on your overall capital and your ability to claw back the money lost.
Say you have £10,000 of trading capital and you’re unlucky enough to make a loss on 15 trades in a row. Below you can see the difference between risking 2%, 5% or 10% per trade:
With 2% risk per trade, even after 15 losses you’ve lost less than 25% of your capital. It’s conceivable that you can get this money back.