New traders might not know it right away, but when they start trading, they will realize how crazy it is to profit in the financial market. There are so many risks and if you aren’t prepared, you will end up on the dark side of the road. But it is important to understand these risks, especially with CFD trading.
Unexpectedly closing your positions, causing losses.
When you trade CFDs, you are required to keep a particular amount of money in keeping your trades open. This is what’s known as margin. But if your account balance cannot cover your margin requirements, your broker may close your position voluntarily. To avoid this, it is important to always keep an eye on the running balance in your account and add more before it gets close to your margin requirement.
Large, sudden unexpected losses.
Markets in CFDs can be volatile. At times, it moves too quickly and unexpected changes in the market happen from time to time. To mitigate the losses, you must keep yourself updated on any significant movement or economic news. Then, do not forget to set stops and limits as part of your risk management strategy.
When you have an order that gets filled in different levels from the ones you previously requested.
Whenever the market moves instantly in a long way, it creates a gap, and the orders you placed get filled at the worst possible level compared to the ones you requested. This is known as slippage. To mitigate the risks, you can use a guaranteed stop loss to enhance the watertight protection for the damage of slippage.
You may lose more than the capital in your trading account.
Since CFDs are leveraged products, you are only required to use a percentage of the total amount of your instrument. This means that you can gain more than you invested but you can also lose more than your initial trading deposit. To mitigate the risks, you can lock your profits through the use of automatic stop limits or stops. They define your level of risk appetite.
Dealing With The Risks in Leverage
Although you are only going to put a small amount to open the full price of an instrument, the profit, as well as the losses that you will get, will all be based on the value of your instrument. This means that you may win or lose a large amount when compared to your initial deposit.
To protect yourself from huge losses when using leverage in CFD trading, you have to set a stop-loss, a tool that automatically closes your position to fully protect your profit in case the market moves against you.
What are the risks brought by leverage?
First of all, leverage is very helpful especially to new traders who are yet to have huge capital to start trading in the market. With leverage, you can get larger market exposure just by tying up a partial initial deposit. This is why leverage magnifies gains but also magnifies losses, unfortunately.