Top 2 Major Risks in CFD Trading And Tips To Managing Them

CFD traders are facing numerous risks in their profile every day. However, the two major risks are leverage and volatility. To avoid getting compromised with these risks, it is important to know more about leverage and volatility and the countermeasures that you need to do to avoid hurting your trading funds.

Leverage

What is leverage? Is it a good thing? Will it help gain more profits in CFD trading? CFDs have become so popular thanks to being a leveraged product. With leverage, you are only requested to pay a small amount of deposit to open a trading position. This deposit is known as margin. A small deposit sounds so enticing, especially to new traders. With the small deposit that you are required to pay, you get full exposure to a larger position in the market. Your gains will multiply if you have rightfully predicted the movement of the market.

However, you can’t just recognize the good things offered by leverage. There are cons that you must be aware of. As much as gains are magnified with leverage, losses are also magnified in case the market works against you. For this reason, you must be wary and use leverage with caution.

Volatility

Another major risk of trading CFDs is volatility. What is volatility? It is the swift movement of the market. Volatile markets are able to make unexpected and quick moves. Some of the driving factors are political upheavals, earning announcements, natural disasters, and more. These events could impact the movements of markets like commodities, equities, Forex, and bonds. Volatility is not entirely bad since many trading opportunities are opened because of it. But with poor handling of risks, it will pose danger to your account.

Knowing and Managing the Risks in CFD Trading

Traders in CFD who already have years of experience know the fact that there are a considerable amount of risks to know about. But these risks can be countered through the help of a good trading strategy. There are risk management tools that can help you elevate the risks while limiting the losses.

One of the things you can do to lower the risks is to manage the use of margin. Trade positions in CFD must be considered prudently. You don’t just use all your free equity without thinking of possible losses. Sufficient funds in your account are needed to continue to trade. If you suffer a significant loss and your broker automatically closes your position because you cannot add more funds to your account, then it would be so devastating. Avoid margin calls by keeping enough funds in your account.

Using stop-loss order and other risk management tools are also significant in CFD trading. You trade because you want to profit from price movements. But if you incur too many losses, that major goal gets neglected. Using stop loss will help you limit your losses because it automatically closes a trade once it passes a certain parameter set by the trader at the beginning of the trade. Aside from stop loss, you can also use trailing stop loss and guaranteed stop loss as your risk management tools.