Before starting to trade CFDs it is important that you understand the risks involved and how to effectively manage them. While there are many opportunities, there are also CFD risks which need to be minimised.
One of the main risks of trading CFDs comes from the advantage of it being a leveraged product. This allows traders high levels of market exposure with only a small percentage of the overall value required. There is a possibility that profits will be multiplied if the market moves in your favour.
However, the same is true if the market goes against you. Losses can exceed deposits, as the exposure to the markets is the same. If only a 5% deposit is required but the market goes against you by 10% then double your investment will be lost, for example. This CFD trading risk is the most common and can affect trading on any of the global markets, whatever the underlying assets may be.
Many trading opportunities are presented thanks to market volatility, but this can also pose a lot of CFD risks. Especially when these occur outside of normal business hours, there can be little traders can do and in some cases accounts and positions may be closed if they fall below the close-out level.
Certain volatility can be predicted, with upcoming political elections and major earning announcements. Others, such as natural disasters, are less predictable yet will still present plenty of CFD trading risk across forex, commodities, equities and other markets. In some cases, the volatility can help the markets move in your favour but at others they will not.
Managing CFD trading risk effectively is essential for any trading strategy to be successful. There are a few simple ways to do this:
- Use margin sparingly to ensure you have enough funds to cover any losses.
- Install stop losses, which will close-out positions when they reach a certain point to limit losses.
- Hedge against any other investments by shorting against assets you have in your portfolio, which can mitigate short-term loss.
The risks of trading CFDs are outweighed by the advantages and potential they hold, but it is important to understand them and know how to manage all CFD risks.
Try a free demo account if you are new to trading CFDs to lower the risks when you begin trading for real. Open an account to get started, with the choice of an executive or premiere account aimed at new and intermediate and professional-level traders.