Trading is always about risks, but it doesn’t mean you can’t decrease or even exclude them. Most traders who monitor cryptocurrencies, forex, shares, and commodity markets are familiar with Contracts for Difference. Such agreements are simple to open even for newcomers. But risk prevention should be in the first place in CFD trading online. So, today you can discover more about the general risks and how to cope with them.
What Is CFD Trading?
Contract for Difference can be opened between two parties: a buyer and a seller. In most cases, you choose the forex, shares, commodity, or other market and monitor it. Online trading allows you to use diverse instruments that notify you when it’s better to stop dealing.
When you close the contract, one of the parties pays the difference between the primary and the closing price. It depends on whether the cost has risen or decreased. So, you can either get some profit or loss; that is where the risk appears, and you can decrease it before you open a CFD.
Most Common Risks in CFD Trading
As you can’t regulate the price movement on the market, sometimes it changes not for your benefit. Here are some recommendations on how to protect yourself from unexpected loss.
Prevent the risk of losing more than your deposit
CFD trading is leveraged, which means you only need to deposit a position margin, which is about 10 percent of the whole contract value. However, the cost of the trade is higher, so your profit or loss will also rise. In some cases, you can lose more than your deposit and need to make further payments.
It’s not a pleasure to trade in such a way; that’s why you should work out a strategy before opening a CFD. Also, you’d better not buy a CFD that costs more than you can afford. So, you should define your capital at the present moment.
Account close-out risk
Online platforms where you can trade have the close-out level. When the funds in your deposit are not enough, some or all of your positions might be automatically closed. In most cases, you lose your profits and, sometimes, the account.
To prevent this, you should constantly check your deposit and the opened contracts. If you see you can’t handle something, you may close one or several positions to avoid the account closure.
Gapping and volatility
The markets are unstable, and prices might change unexpectedly. There are such instruments as stop loss and limit orders that help you cope with volatility. They automatically close the trade position when the commodity value reaches a particular level. So, a limit order can save most of your profit. On the other hand, if it’s not possible, the stop loss protects you from the high losses.
Trade CFDs Safely
Risk prevention is highly required in trading, especially if you’re a beginner. You should consider the account close-out, gapping, and volatility, and the risk of losing more than you place on the deposit. Fortunately, if you apply prevention instruments, you can trade with fewer losses and get more profit.