2% Rule with CFDs versus Spread Trading

The rule is very easy to understand.

Whether you trade using CFDs or Spread Betting, the rule is the same.

Never risk more than 2% of your portfolio on any one trade.

It’s one rule that you can use whether you have a R1,000 account or a R10,000,000 account.

You see, trading is a forever business.

This means, as a trader you should risk as little of your portfolio as possible in order to stay in the game longer.

We’ll now go straight into how you to enter your CFDs and Spread Betting trades using the 2% rule.

How to enter your CFD trade using the 2% Rule

Here are the specifics for the trade

CFD of the underlying Company: TIM Ltd CFDs
Portfolio value: R100,000
2% Max risk per CFD trade: R2,000
Entry price: R400.00
Stop loss price: R380.00

To calculate the no. of CFDs you’ll buy per trade, you’ll need the:

~ Max risk per trade
~ Entry Price and
~ Stop loss price

Next, you’ll need to follow two steps:

Step #1:
Calculate the risk in trade

The ‘risk in trade’ is the price difference between where you enter and where your stop loss is:
Risk in trade = (Entry price – Stop loss price)
= (R400 – R380)
= R20

Step #2:
Calculate the no. of CFDs to buy

No. of CFDs to buy = (2% Risk ÷ Risk in trade)
= (R2,000 ÷ R20)
= 100 CFDs
In your platform you’ll type in 100 TIM CFDs to buy, place your entry price at R400 and your stop loss price at R380 to risk only 2% of your portfolio.

Note: 1 CFD = 1 Share exposure
100 CFDs = 100 Shares exposure

How to enter your Spread Trade using the 2% Rule

With spread trading you trade on a ‘value per 1 point’ basis.

You’ll choose either: R0.01, R0.10, R1 or any other amount per 1 cent movement in the underlying market.

If you choose R0.10 value per 1 cent movement, for every 10 cents the market moves against or for you, you’ll lose or gain 100 cents (10 cents value per point X 10 cents movement).

Here are the specifics for the spread trade.

Contract of the underlying Company: TIM Ltd

Portfolio value: R100,000
2% Max risk per Spread trade: 200,000c (R2,000)
Entry price: 40,000c (R400.00)
Stop loss price: 38,000c (R380.00)

To calculate the ‘Value Per Point’ to enter your long (buy) trade, you’ll need the:
~ Max risk per trade
~ Entry Price
~ Stop loss price
Next, you’ll need to follow two steps:

Step #1:
Calculate the risk in trade

Risk in trade = (Entry price – Stop loss price)
= (40,000c – R38,000c)
= 2,000c (R20.00)

Step #2:
Value per 1 cent movement

Value per 1 cent movement
= (2% Risk ÷ Risk in trade)
= (200,000c ÷ 2,000c)
= 100c (R1.00)

This means, with a ‘Value per point of 100c’ every 1 cent the TIM Ltd share price moves, you’ll make or lose 100 cents.

Every 2,000c the market moves, you’ll make or lose 200,000c or R2,000 of your portfolio (100c Value per 1 cent movement X 2,000c movement).

Note:
1 Cent per 1 cent movement = 1 Share exposure
100 Cents per 1 cent movement = 100 Shares exposure