Trading can be overwhelming at first, and you may encounter a lot of problems. However, you’ll feel at ease once you get used to it.
Trading contract for differences (CFD) has a lot of benefits. It’s a contract between the buyer and the seller wherein the buyer becomes a partial owner of the underlying asset. By being the partial owner, the buyer is required to pay for only a percentage of the whole price of the asset.
So if you’re planning to trade contract for differences (CFD), you can increase exposure in different markets. However, just like any other form of trading, CFD trading also has some risks.
If you want to know more about the risks of trading contract for differences (CFD), then you should check the list below!
1. You may encounter untrustworthy provider
One of the things you need to do when investing in CFD is to look for the best broker. But since CFDs are unregulated, there’s a high probability that you may encounter a contract that doesn’t favour the buyers.
Furthermore, sometimes even if the contract contains reasonable claims, the broker might not be able to fulfil what’s stated. So you might end up losing money and even your entire investment when things go against you.
To manage this risk, it’s essential to conduct thorough research first before you agree with the broker or CFD provider. Additionally, create a strategy you can hold on to in case things don’t go as expected.
2. It can easily be affected by market movement
Since you can get high exposure when you’re trading contract for differences (CFD), the market movement can easily affect your status. Furthermore, various factors may affect the market, including natural calamities and the government, so speculating its movement can be difficult.
In this case, even professional traders can often read the pattern in the wrong direction. And once you lose your focus, it can lead you to a more difficult position.
How will you be able to manage this risk? You can use tools that can give you a nudge on when’s the right time to open or close a position. On the other hand, you can also create a foolproof strategy that will protect you when the market suddenly moves.
3. There’s a possibility to close your account
Are you afraid of hitting the margin call? First of all, a margin call happens when an investor reaches the amount below the CFD provider’s requirement. It means that if you’re an investor, and you keep on losing, there’s a chance that you may never win again. If that happens, you’ll get a margin call, and your account closes.
Once your account has been closed, it’ll be hard for you to get back in the game again.
If you don’t wish for this to happen, you must never do things without thinking about it. Moreover, when opening a position, start with small sizes to minimise the risks. You can also use adequate tools that can warn you once you’ve reached your limit.
4. There’s also the risk of gapping
When you’re trading contract for differences (CFD), you’re allowed to buy long and open a position during closed markets. Sure, you might already know the additional fees when opening a position at this time. However, there’s another risk you should know— the gapping.
As mentioned before, the market tends to move rapidly. If you have an open position when the market closes, and there’s news that affects the market movement, there’s a probability that the market moves without any warning. It’s when it suddenly shifts without passing any movement in between.
To manage this risk, you must know how leverage and margin rates work before opting for CFD trading. In addition, you can always apply for an order boundary where you can limit the price you’re willing to accept when things get worse.
5. Your money may not be safe
As you may know, there are certain situations where CFDs don’t come from reputable providers. Furthermore, since it can be done over the counter, there’s a potential risk you‘ll take when you’re not familiar with the process.
But just as with any other trading investment, there are times when your money is not protected. So to avoid getting mixed up with this risk, make sure you know how leverage works. Aside from that, take some time in doing a lot of research before investing in CFDs.
If you think you’re not ready yet to face these risks, you can try to open a practise account and gain more experience. Furthermore, you should also study a lot more about trading CFDs, and create your strategies to manage the risks you’re about to take.
Don’t forget to share your thought about CFD trading and its risks by commenting below!
