January 26, 2022

Risk Management Tips: How To Manage Risks in CFD Trading

3 min read

Over the past few years, CFDs became one of the most sought-after trading derivatives all over the world. It is especially known for stocks trading and forex trading.

Attracted by the high leverage it offers, investors do not fear the risks until they experience their first loss.

Risk #1: Leverage

The excitement of trading and knowing that you can speculate the market prices without paying the full amount of the underlying asset.

You can maximize your profits through leverage trading. But a high leverage ratio comes with a considerable amount of risks.

You are then required to use a risk management strategy that will help you handle your trades efficiently. Although you might still suffer from losses, it won’t be that huge and won’t wipe out your trading capital.

Most of the time, you will be asked to pay 1% to 5% gross position value or much lesser.

As for the risk management strategy that you should use, you can opt for a stop-loss order or a limit order because they can shield your trading capital and ensure that losses will never overpower your gains.

Leverage is a very powerful instrument that can help you speed up profitability. Without a doubt, it is capable of giving you twice the result with just half the effort. But the effect of leverage also works in both ways.

You must only take the courage to seize the opportunity in the market if you have the tools to manage the risks. You may double your profits but you will also double the risks.

Therefore, as much as possible, you should only trade with the amount of leverage appropriate for your experience as a trader.

If you are new to the market, you can have a lower leverage ratio and slowly increase its number as you start to gain additional knowledge about the market.

Risk #2: No Licensed or Regulation

Nowadays, a lot of brokers or trading platforms hide their real intentions from unsuspecting traders. They offer attractive services without revealing that they are actually not licensed and regulated.

Then the trader will face additional risks, misquotation, and even illiquidity. In trading CFDs, these kinds of activities are quite common.

Therefore, before you transact with a third-party agent, you must see to it that they are licensed and regulated so you won’t suffer additional risks and put your capital in danger.

To protect traders and investors, there are now a lot of government buddies and institutions that enhance the protection of these vulnerable people.

The four authoritative agencies conducting stringent regulations to brokers are as follows;

  • EU Financial Instruments Market Management (MiFID)
  • U.S Commodity Futures Trading Commission (CFTC)
  • Australian Securities and Investment Commission (ASIC)
  • U.K Financial Conduct Authority (FCA)

These agencies have the power to enforce the law and protect the welfare of traders and investors.

For instance, the FCA is responsible for withdrawing mandates to those non-compliance members. It also has the power to shut down any non-compliance websites by executing its power to the networking provider.

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