Risk Diversification for Retail CFD Traders

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Risks of CFD trading

As a new trader, it’s important to understand the risks associated with CFD trading before you start trading with a live account.

CFDs are a leveraged product

Leverage gives you exposure to the markets by depositing just a percentage of the full value of the trade you wish to place. This means that while you could make a potential profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don’t have adequate risk management in place.

​For instance, if you place a CFD trade worth £1,000 and the margin rate for the applicable tier is 5%, you only need to fund 5% of the total value of the position, known as position margin. In this case, you only need to allocate £50 to open the trade. If, however, the price of the product moves against you by 10%, you lose £100 – double your initial stake in the CFD trade. This is because your exposure to the market (or your risk) is the same as if you had purchased £1,000 worth of physical shares. This means that any move in the market will have a greater effect on your capital than if you had purchased the same value of shares. However, retail client accounts have negative balance protection, so your losses will be limited to the value of the funds in your account.

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Risk of account close-out

Market volatility and rapid changes in price, which may arise outside normal business hours if you are trading international markets, can cause the balance of your account to change quickly. If you don’t have sufficient funds in your account to cover these situations, there is a risk that your positions will be automatically closed by the platform if the balance of your account falls below the close-out level (as shown on the platform).

You should continuously monitor your account and deposit additional funds or close your positions (or a portion of your positions) so that the funds in your account cover the total margin requirement at all times.​

The information icon within the main account bar at the top of the platform will detail all your account information, including the close-out percentage level.​

Account close-out example:
If the current close-out percentage level is 50% and you have four trades open that each require £500 worth of position margin, your total position margin requirement will be £2,000. If your account revaluation amount then drops to less than 50% of the total margin requirement, in this case £1,000, some or all of the trades constituting this position may be closed out, potentially at a loss to you.

The account revaluation amount is the sum of your cash and any net unrealised profit or loss (as applicable), where net unrealised profit or loss is calculated using the level 1 mid-price.

Market volatility and gapping

Financial markets may fluctuate rapidly and the prices of our instruments will reflect this. Gapping is a risk that arises as a result of market volatility. Gapping occurs when the prices of our instruments suddenly shift from one level to another, without passing through the level in between. There may not always be an opportunity for you to place an order or for the platform to execute an order between the two price levels. One of the effects of this may be that stop-loss orders are executed at unfavourable prices, either higher or lower than you may have anticipated, depending on the direction of your trade. You are able to limit the risk and impact of market volatility by applying an order boundary or guaranteed stop-loss order.

Holding costs

Depending on the positions you hold, and how long you hold them for, you may incur holding costs. These holding costs are applied to your account on a daily basis if you hold positions on certain instruments overnight past 5pm New York time. In some cases, particularly if you hold positions for a long time, the sum of these holding costs may exceed the amount of any profits, or they could significantly increase losses. It is important that you have sufficient funds in your account to cover your holding costs.

CFD trading carries a high level of risk to your capital compared to other kinds of investments, and prices could move rapidly against you. Therefore, CFD trading may not be appropriate for everyone and we recommend that you understand the risks, and seek independent professional advice if necessary, before deciding whether to start CFD trading.

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CFD Trading 2020 – Tutorial and Brokers

Day trading with CFDs is a popular strategy. The leverage and costs of CFD trading make it a viable option for active traders and intraday trades. This page provides an introductory guide, plus tips and strategy for using CFDs. We also list the best CFD brokers in 2020.

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What Is A CFD?

A CFD is a contract between two parties. They agree to pay the difference between the opening price and closing price of a particular market or asset. It is therefore a way to speculate on price movement, without owning the actual asset.

The performance of the CFD reflects the underlying asset. Profit and loss are established when that underlying asset value shifts in relation to the position of the opening price.

When trading CFDs with a broker, you do not own the asset being traded. You are speculating on the price movement, up or down.

CFD Example

Lets use an example. Say you select a stock with an ask price of $25 and you open a CFD to the value of 100 shares.

If buying shares the traditional way, the cost would be $2,500. There might also be commission or trading costs.

However, a CFD broker will often require just a 5% margin. This will allow you to enter the same trade but with only $125. (Actual levels of leverage or margin will vary). This makes it an attractive hunting ground for the intraday trader. The risk and reward ratio is increased, making short term trades more viable.

When you enter your CFD, the position will show a loss equal to the size of the spread. This means if the spread from your broker is 5 cents, you’ll need the stock to appreciate by at least 5 cents to break even.

CFD vs Stock

Using the above example: Let’s say the price of the underlying stock continues to increase and reaches a bid price of $26.00

If you owned the stock, your holding is now worth $2600. A nice profit – ignoring commission or trading costs the trader realised $100.

However, with the underlying stock at $26.00, the CFD would show the same $100 profit – but it required way less to open, just $125. So in terms of percentage, the CFD returned much greater profits. Had the market moved the other way, losses relative to our investment would have been larger too – both risk and reward are increased.

There are of course other benefits to owning an asset rather than speculating on the price. We also ignored commissions and spreads for clarity. But the above does illustrate the relative differences in the two methods of investing.

Application

As you are day trading you probably won’t hold any CFD positions overnight. Instead, you’ll likely place a high number of CFD trades in a single day. To maximise your returns you’ll want to concentrate on liquid volatile markets. CFD trading with oil, bitcoin, and forex are all popular options, for example.

CFD Benefits

You may have already gleaned a couple of advantages above from CFDs, but let’s break them down and add a few more.

  • Leverage – CFD leverage is much higher than traditional trading. You can get margin requirements as little as 2%. The rate usually depends on the underlying asset. Shares or volatile cryptocurrencies, for example, can reach up to 20%. Whilst low margin rates will allow you to take big positions with less capital, losses will also hit you harder.
  • Accessibility – The best CFD brokers will allow you to trade in all of the major markets. With so many markets that means CFD trading hours effectively run 24 hours a day. You’ll just need to check your brokers trading hours first.
  • Cost – CFD trading systems incur minimal costs. You will find many brokers charge little or zero fees to enter and exit trades. Instead, they make their money when you have to pay the spread. The size of the spread will depend on the volatility of the underlying asset. Note it is usually a fixed spread.
  • Less shorting rules – Some markets enforce rules that prevent you shorting at certain times. They can demand greater margin requirements for shorting as opposed to being long. The CFD market, however, generally doesn’t have such rules, as you’re not actually owning the underlying asset. This means no borrowing or shorting costs.
  • Less day trading requirements – Some markets require significant capital to start trading. This limits you to how many trades you can make, and in turn how much profit. An online CFD trader, however, can set up an account with as little as $1,000 to $5,000.
  • Diversity – Whatever peaks your interest, you’ll probably find a CFD vehicle. You can start CFD FX trading, as well as utilising treasury, commodities, cryptocurrencies, and index CFDs.

CFD Risks

Despite the numerous benefits, there remain a couple of downsides to CFDs you should be aware of.

  • Regulation – The CFD industry is not thoroughly regulated. This means it’s increasingly important you select the right broker. You need to make sure they are credible and in a strong financial position. For more guidance, see our brokers page.
  • Trading on margin – While margin increases profit potential, it also increases risk. It is very easy to lose sight of the total exposure you have when using margin. $2000 worth of open positions using 5% margins mean exposure to $40,000 worth of contracts. You are effectively borrowing $38k from your broker. If markets move against you, losses can exceed deposits. An awareness of the total exposure is very important.

How To Start Trading CFDs

One of the selling points of trading with CFDs is how straightforward it is to get going. You’ll need to follow just five simple steps.

1. Choose A Market

There are thousands of individual markets to choose from, including currencies, commodities, plus interest rates and bonds. Try and opt for a market you have a good understanding of. This will help you react to market developments. Most online platforms and apps have a search function that makes this process quick and hassle-free.

2. Buy Or Sell

If you buy you go long. If you sell you go short. Bring up the trading ticket on your platform and you will be able to see the current price. The first price will be the bid (sell price). The second price will be the offer (buy price).

The price of your CFD is based on the price of the underlying instrument. If you have a reason to believe the market will increase, you should buy. If you believe it will decline you should sell.

3. Trade Size

You now need to select the size of CFDs you want to trade. With a CFD, you control the size of your investment. So although the price of the underlying asset will vary, you decide how much to invest. Brokers will however, have minimum margin requirements – or more simply, a minimum amount that is required in order for the trade to be opened. This will vary asset by asset. It will always be made clear however, as will the total value (or your exposure) of the trade.

Volatile assets such as cryptocurrency normally have higher margin requirements. So a position with exposure to $2000 worth of Bitcoin, might need margin of $1000 for example. A well traded stock however, may only need 5% margin. So a $2000 position on Facebook, may only require $100 of account funds.

4. Add Stops & Limits

This will help you secure profits and limit any losses. Most CFD strategies for beginners and experienced traders will employ the use of stop losses and/or limit orders. They tie in with your risk management strategy. Once you have defined your risk tolerance you can place a stop loss to automatically close a trade once the market hits a pre-determined level. This will help you minimise losses and keep your accounts in the black – leaving you to fight another day on subsequent trades.

A limit order will instruct your platform to close a trade at a price that is better than the current market level. If you opt for a trading bot they will use pre-programmed instructions like these to enter and exit trades in line with your trading plan. These are perfect for closing trades near resistance levels, without having to constantly monitor all positions.

5. Monitor & Close

Once you’ve placed your trade and stop or loss limits, your profits will shift along with the market price. You can view the market price in real time and you can add or close new trades. This can be done on most online platforms or through apps.

If your stop loss or limit order hasn’t been activated you can close it yourself. Simply select ‘close position’ from the positions window. You will be able to see your profit or loss almost instantly in your account balance.

Strategies

Choosing the right market is one hurdle, but without an effective strategy, your profits will be few and far between. You need to find a strategy that compliments your trading style. That means it plays to your strengths, such as technical analysis. It also means it needs to fit in with your risk tolerance and financial situation.

Below two popular and successful CFD trading strategies and tips have been outlined.

Breakout Strategy

This simply requires you identifying a key price level for a given security. When the price hits your key level, you buy or sell, dependent on the trend. The main thing to remember with breakout trading is to avoid any trades when the market isn’t providing clear signals.

If you can’t quite tell which direction the overall trend is moving in then give it a miss. This is where detailed technical analysis can help. Use charts to identify patterns that will give you the best chance of telling you where the trend is heading.

Contrarian Strategy

This is all about timing. Your plan rests on the knowledge that trends don’t last forever. If a stock’s price has been on the decline then you identify a point where you believe it’s near the end of the trend. Then you enter a buy position in anticipation of the trend turning in the other direction.

You can follow exactly the same procedure if the price is rising. You can short a stock that has been increasing in price when you think a sharp change is imminent. Both Wave Theory and a range of analytical tools will help you ascertain when those shifts are going to take place.

For further guidance, see our strategies page.

CFD Trading Tips

If you’re looking to really bolster your profits consider these tips from top traders. Learn from their mistakes and hopefully, you won’t run into the same expensive pitfalls.

Control Your Leverage

Leverage is your greatest asset when you’ve made the right trade. The temptation to increase your position sizes when you’re winning is difficult to resist. However, there is always a loss on the horizon.

You don’t want to be the trader that turns a small account into a huge account, only to end up back at square one. So, you need to be smart. Nobody wants the margin calls and the stress that come with big losses. As Paul Tudor Jones famously said, ‘Don’t focus on making money, focus on protecting what you have.’

Having said that, start small to begin with. Keep your exposure relatively low in comparison to your capital. It’s a good idea not to leverage more than 3 times your account size, particularly at the beginning.

As your capital grows and you iron out creases in your strategy, you can slowly increase your leverage.

Keep A Journal

A bit like a diary, but swap out descriptions of your crush for entry and exit points, price, position size and so on. This will be your bible when it comes to looking back and identifying mistakes. CFD trading journals are often overlooked, but their use can prove invaluable.

Hindsight is a powerful force, don’t waste it. You’ll be able to identify patterns, reflect on your trading emotions and streamline strategies. A thorough trading journal should include the following:

  • The instrument
  • The time you entered and exited the trade
  • Reasons for the trade, technical, news-based, etc.
  • Whether it was a profit or loss
  • A review of your trade performance (including whether you followed your trading rules)
  • What you learnt from the trade

It may sound time-consuming but it will allow you to constantly review and improve. You’ll make smarter and faster decisions, whilst those without are still scratching their heads wondering what they’ve been doing wrong for the last few weeks.

Use Stops

Used correctly you’ll be able to minimise your losses, keeping you in the game. Each trade you enter needs a crystal clear CFD stop. This is because emotions will inevitably run high and the temptation to hold on that little bit longer can be hard to resist. As William O’Neil correctly pointed out, ‘letting losses run is the most serious mistake made by most investors.’

So, define a CFD stop outside of market hours and stick to it religiously. This will also help you anticipate your maximum possible loss. You can then use the time you would be fighting an internal battle to research and prepare for the next trade.

Demo Accounts

When you’ve completed your research and you’ve finally got the capital to start trading, it can be hard to resist jumping in head first. However, the switched on day trader will test out his strategy with a demo account first.

Plenty of brokers offer these practice accounts. They’re funded with simulated money, making them the ideal place to make mistakes before your real money is on the line. Not only can you test your strategy and get familiar with CFD trading markets, but they’re also an effective way to try your broker’s trading platform. You can make sure it has all the charting and analysis tools your trading plan requires.

When you’re comfortable and seeing consistent results on your demo account, then upgrade to a live account.

Education

Nobody likes to hear it, but school isn’t over. The best traders will never stop learning. You need to keep abreast of market developments, whilst practising and perfecting new CFD trading strategies. Learning from successful traders will also help. To do all of this you’ll need to utilise a range of different resources. To name just a few:

Regional Differences

Taxes

Although you can trade CFDs all over the world, where you’re based and the market you’re trading in can throw an expensive spanner in the works. CFD trading in the USA will be different to that in the UK, Australia, India, South Africa, and Singapore.

This is mainly because of taxes. Different countries view CFDs differently. Some consider them a form of gambling activity and therefore free from tax. Some countries consider them taxable just like any other form of income.

The tax implications in the UK, for example, will see CFD trading fall under the capital gains tax requirements. Although you get a £10,100 annual exemption, any profits that exceed that will be taxed. This means you should keep a detailed record of transactions so you can make accurate calculations at the end of the tax year.

So, before you start trading, find out whether you’ll pay personal income tax, business tax, capital gains tax, or if you’re lucky, no tax. Once you know what type of tax obligation you will face you can incorporate that into your money management strategy.

For more detailed guidance, see our taxes page.

Final Word

Day trading CFDs can be comparatively less risky than other instruments. Having said that, it will still be challenging to craft and implement a consistently profitable strategy. If you want to be a successful CFD trader you will need to utilise the educational resources above and follow the tips mentioned. As successful trader Alex Hahn pointed out, If you master your thinking and your emotions, nothing can stop you.’ So, the ball is in your half of the court now, go and turn it into gold.

What Is CFD Trading?

A CFD stands for contract for difference. CFD trading allows you to take a position on the price of an instrument without actually owning the underlying asset. One of the most unique aspects of CFDs is that they enable you to profit from falling markets as well as rising ones.

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Since the recording of these videos, negative balance protection has come into force from 02.10.17. This means that whilst trading losses cannot exceed funds in your account, your capital is still at risk.

In this lesson you can learn:

  • What CFDs are and the benefits and risks of trading them
  • What leverage is and how to use it in practice
  • What makes CFDs so popular

What Are CFDs?

Let’s first address the most basic question: what is a CFD? The term CFD stands for contracts for difference.

A contract for difference creates, as its name suggests, a contract between two parties (typically described as ‘buyer’ and ‘seller’) on the movement of an asset price.

There are several key features of CFDs that make them a unique and exciting product:

  • CFDs are a derivatives product
  • CFDs are leveraged
  • You can profit and incur losses from both rising and falling prices

Why Are CFDs a ‘Derivatives’ Product?

The term ‘derivatives product’ simply means that when trading CFDs, you don’t actually own the underlying asset. You’re simply speculating on whether the price will rise or fall. When you trade a CFD, you are agreeing to exchange the difference in the price of an asset from the moment the contract is opened, to the moment it’s closed.

Let’s take stock investing as an example. You’d like to purchase 10,000 shares of Barclays and its share price is 280p, which means that the total investment would cost you £28,000, not including the commission or other fees your broker would charge for the transaction. In exchange for this, you receive a stock certificate, legal documentation that certifies ownership of shares. In other words, you have something physical to hold in your hands until you decide to sell them, preferably for a profit.

With CFDs, however, you don’t own those Barclays shares. You’re simply speculating, and potentially profiting, from the same movements in share price.

What Is Leverage in CFD Trading?

Leverage means you gain a much larger market exposure for a relatively small initial deposit. In other words, your return on your investment is significantly larger than in other forms of trading.

Let’s go back to the Barclays example. Those 10,000 shares of Barclays are at 280p, costing you £28,000 and not including any additional fees or commissions.

With CFD trading, however, you only need a small percentage of the total trade value to open the position and maintain the same level of exposure. Let’s suppose that XTB gives you 5:1 (or 20%) leverage on Barclays shares. This means that you would only need to deposit an initial £5,600 to trade the same amount.

If Barclays shares rise 10% to 308p, the value of the position is now £30,800. So with an initial deposit of just £5,600, this CFD trade has made a profit of £2,800. That’s a 50% return on your investment, compared to just a 10% return if the shares were bought physically.

The important thing to remember about leverage, however, is that while it can magnify your profits, your losses are also magnified in the same way. So if prices move against you, you may be closed out of your position by a margin call or have to top up your funds to keep it open. This is why it’s important to understand how to manage your risk.

If Barclays shares fall 10% to 252p, the value of the position is now £25,200. So with an initial deposit of just £5,600, this CFD trade has made a loss of £2,800. That’s a -50% loss on your investment, compared to just a -10% loss if the shares were bought physically.

What Is ‘Trading on Margin’ with CFDs?

Trading on margin is simply another term to describe leveraged trading, because the amount of money required to open and maintain a leveraged position is called the ‘margin’.

Range of CFDs with XTB

We offer contracts for difference (CFDs) on over 1500 global markets and multiple asset classes, all with the ability to utilise leverage and go both long or short. This includes:

How Do CFDs Work?

Now that you know what CFDs are, let’s take a closer look at how CFDs work. To understand how CFDs work, it’s important to have a good grasp of the following concepts, and how they apply to CFD trading:

  • Spread and commission
  • Deal size
  • Duration

Spread and Commission

CFDs are quoted in two prices: the buy price and the sell price, and allow you to profit from both rising and falling prices.

  • If you believe the price of an asset is going to rise, you go long or ‘buy’ and you’ll profit from every increase in price.
  • If you believe the price of an asset is going to fall, you go short or ‘sell’ and you’ll profit from every fall in price.

Of course, if the markets don’t move in the direction you expect, you’ll suffer a loss.

So, if you believe, for example, that Apple’s share price will fall in value, you simply go short on Apple share CFDs and your profits will rise in line with any fall in price below your opening level. However, should Apple’s share price actually rise, you would suffer a loss for every rise in price. How much you profit or lose will depend on your position size (lot size) and the size of the market price movement.

The ability to go long or short, along with the fact that CFDs are a leveraged product, makes CFDs one of the most flexible and popular ways of trading short term movement in financial markets today.

Deal Size

Trading CFDs is more similar to traditional trading than other derivatives, such as spread bets or options. This is largely due to the fact that CFDs are traded in standardised contracts, or lots. The size of an individual lot depends on the underlying asset being traded, often mimicking how that asset is traded on the market.

Duration of the Trade

More often than not, CFD trades have no fixed expiry. A position can be closed simply by placing a trade in the opposite direction to the one that opened it.

What are the risks of CFD trading?

CFD trading can be lucrative, but there are many risks to watch out for.

Last updated: 28 February 2020

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A Contract for Difference (CFD) is a highly leveraged, complex product which is ideally suited to very experienced traders and investors. CFDs can be highly lucrative and provide an opportunity to make a lot of money quickly, but you can also lose a lot of money just as quickly if you’re not experienced. This guide covers the risks involved with CFD trading.

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What is CFD trading?

CFDs allow traders to speculate on the value movements of a large range of financial products and assets – anything from share prices and currency pairs to the price of gold or oil. CFD traders do not own the underlying asset nor are they trading the asset itself but are instead speculating on whether its value will increase or decrease. For more information on CFDs, check out our guide: What is a Contract for Difference (CFD)?

What are the risks of CFD trading?

CFDs can seem appealing as you have the potential to earn a lot of money quite quickly. This is because they are highly leveraged, so even though you only need to put forward a small margin of the complete trade value to initiate a trade, you can still benefit from 100% of potential gains. But there are many risks involved, which are detailed in this section.

CFDs are complex

CFDs are complex products so there’s room for misunderstanding and trading errors. While investing in shares is a strategy suited to both new or experienced investors, CFDs are best left to highly experienced traders.

You could lose more than your initial capital

If you put $50 into a pokie machine, the most you stand to lose is $50. However, with CFD trading you could lose more than you originally invested. Trading CFDs is more risky than traditional share trading as you’re trading with leverage. Traders are only required to put forward a small amount of the total trade value, often only 5%. However, if the trade goes in their favour, they are entitled to 100% of the profits. But the reverse is also true: traders are responsible for 100% of the losses too. Let’s look at the fictional example below, courtesy of ASIC’s Moneysmart website.

Imagine a trader buys 4000 CFDs at $5 per order, for a total of $20,000. The CFD has a margin of 5%, meaning the trader only pays $1000 to open the trade (ignoring possible commissions). The trader believes the price of the share will rise in value, so they go long on this trade. If the price of the underlying share the CFD is speculating on rises or falls in value, the table below shows possible gains and losses.

If the price of the share To You could gain
Rises by 20% $6.00 $3934.00
Rises by 10% $5.50 $1937.00
Rises by 5% $5.25 $938.50
If the price of the share To You could lose
Falls by 5% $4.75 $1058.50
Falls by 10% $4.50 $2057.00
Falls by 20% $4.00 $4054.00

If the margin was lower than 5% the risk becomes even greater. In addition to any losses, this table doesn’t take into account any potential commissions, fees or interest the trader may need to pay.

CFDs are contracts

When trading CFDs, you’re buying a contract between you and the CFD provider. The contract outlines your speculations about the value of the financial product or underlying asset and is a legally binding agreement. Unless you have some trading knowledge and the time and patience to digest the provisions of the contract, you could get stung by a hidden clause.

The CFD provider may not act in your best interest

Not all CFD providers will act in the best interests of clients. This is referred to as counterparty risk. For example, there may be a delay between when you place a CFD order and when the provider executes it. This might mean your order is executed at a price which is worse, potentially costing you big dollars. If your trade is making a loss, your CFD provider could close out your trade at a loss without consulting you. The opposite is also true: you could implement a stop-loss order to try to protect yourself from losses, but the CFD provider may not honour this and might keep your trade open even longer. Because of these factors, the success of a CFD trade doesn’t just rely on your ability to make correct speculations and assumptions on the value movements of assets, but it’s also dependant on the CFD provider you use.

Your money might be held with other traders’ money

Every CFD provider has their own terms and conditions, but your money is generally covered by the law against a CFD provider misusing your funds. Some CFD providers may pool your money into one account mixed with money from other investors. They are then permitted by law to withdraw some of this money in the form of an initial margin and also a further margin if they need to. If your CFD provider withdraws this money it’s no longer protected by the law as it’s no longer in a client account and therefore counted as client money. If your money is pooled with other investors there’s an additional risk if one client fails to pay the money they owe in the event they lose a trade. This could delay your payments as the pooled account will be in deficit.

CFDs can be affected by market conditions

Because you’re speculating on the price movements of financial assets, such as shares, your trade will be affected by broader market conditions. However, because CFDs are highly leveraged, even a tiny dip in the market can result in not-so-tiny losses. Trading CFDs could become even more risky if you’re trading during times of economic uncertainty, such as major political elections. However even if the market is stable, there are often unpredictable, seemingly random events that affect the price movements of various financial products, making it almost impossible to predict for even the most experienced traders.

CFDs can move quickly

This is called ‘gapping’ and refers to the idea that a CFD can move in price between, for example, $5.50 and $6.00 without stopping at any of the price points in between. Therefore, even if you’d planned to close a trade at $5.55, you might not get a choice. Because the prices move so quickly, this opens up traders to increased risk.

How to mitigate these risks when trading CFDs

CFDs are a high-risk strategy and this is reflected in the strong warnings regulatory bodies such as ASIC place on them. Most investment strategies have an element of risk, and it’s important to understand what they are and what you can do to mitigate these risks before you begin trading. Here’s some strategies to mitigate the risks of trading CFDs:

Do your research.

Like any investment, it’s important to do lots of research before you begin. The more you understand about the ins-and-outs of CFD trading and the risks involved, the better.

Select asset classes you have experience with.

It’s a good idea to trade CFDs with underlying assets you understand and have experience with. For example, if you have lots of experience with share trading and understand what factors affect share prices, you could consider trading shares CFDs to begin with.

Start small.

It can be tempting to go big when you first get started, but remember when trading with leverage if you have the potential to gain a lot, you also have the potential to lose a lot. Trading in small sizes to begin with is a good way to get comfortable trading with leverage. It also means that if your trade doesn’t go as planned, you’ll only lose a small amount.

Open a free demo account.

Before committing your own money to a trade, why not take advantage of one of the free demo accounts offered by a number of CFD brokers on the market? IG Markets, Saxo Capital Markets and Pepperstone (to name a few) all offer demo accounts that allow you to practice executing trades in a simulated environment, providing you with an opportunity to test strategies and learn the mechanics of trading without risking any of your own capital. They even provide you with a small stipend of virtual funds to practice with.

Use stops and limits.

Tools such as stop losses and limit orders are a great way to minimise your risk, as they effectively allow you to cap your losses at a certain amount. These tools are a good way to protect traders against sudden or unexpected market movements, and are offered by most CFD trading providers.

Understand what you can afford to lose.

As CFDs are highly leveraged products, you can lose a lot more than your initial capital used to place the trade. It’s important to understand how much money you can comfortably afford to lose, so in the event that your trade doesn’t go well, you’re not losing more than you can afford. If you have done plenty of research and have extensive trading experience, you can compare CFD providers in our table below. If you want to learn more about CFDs, read our guide: What are CFDs?

Compare CFD providers

Isaiah Peralta

Isaiah Peralta is the head of distributed support at Finder. He previously worked as a Finder publisher across a variety of topics, including Shopping deals, broadband, credit cards and travel money.

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