While there are a lot of benefits in trading CFDs, there are also potential risks that ought to be noted. Since CFDs are a leveraged product, it is highly profitable and at the same time, offers potential risks and dangers.
You already know that leverage offers so many great things for traders. But all these great things can vanish as potential losses are also mirrored in CFDs. And when talking about losses, CFD trading goes up to the list. There are some traders who are not very careful when choosing CFDs and they simply end up losing the money including the trader’s capital which is very important to pursue your trades.
Professional traders, fortunately, go beyond creating a trading plan. When you use leverage in one of your trades, make sure that you are ready with a strong risk management strategy. With the use of these tools, you can cover your trades and not be able to expose yourself to all levels of risks. Also, if you don’t want your broker to call you and ask for additional funds, you must be sure to use a risk management tool like the stop losses and take profits at the start of your trades.
Another risk of CFD trading is the overnight charges that can be very heavy on the pocket if the trades go on for a long period of time. Overnight charges are being deducted into your account in a daily manner. The charge for this is usually the interest payment being used to finance the open trades.
A margin call is a call made by the broker reminding you of your dues if you happen to be on the losing side and you don’t have enough equity to cover your trading positions. If this happens, your trading account will be put at risk from margin close-out. To avoid this, you need to make sure that you monitor your trades always and that you have enough funds to push through with your trades.
Did you know that a normal stop loss doesn’t ensure that you get to be filled out once a particular market price is reached? This is because slippage could happen at any time and these are brought by two factors, volatility, and liquidity.
When you hold a position in the market, you will surely find risks in closed market periods. In Forex, the closed market period happens on weekends, around Friday 10:00 pm and Sunday 10:00 pm. And if it happens that on Friday, there are large news releases or data releases, it could significantly affect the price when the Sunday opens. This incident is called Gap Risk. If you have open trades, it will surely take a toll on it.
If you really want to be trading CFDs, you have to make sure that you understand leverage and margin. These two work together to benefit the trader but can also turn into a disadvantage if not properly used.