CFD trading is not inherently unsafe, provided it is managed responsibly. The same stands true for other types of trading and investment though. Effective risk management is, however, a vital component of trading CFDs. Highly leveraged CFDs typically carry a high level of risk, and traders may incur significant losses. But let’s take a closer look at what CFD trading entails and the challenges that arise.
Hoe werkt CFD-handel?
Entering a CFD is essentially entering into a contract. The parties to that contract are the broker and the trader. Attached to the CFD is an underlying asset, which varies from CFD to CFD. This includes stocks, metals, commodities, and many others. The CFD enables the trader to speculate on and potentially make a profit from the price movement of the asset. If the trader anticipates the price of the asset to rise, they’ll generally take a long position. Adversely, if they speculate that the price will fall, the trader will in all likelihood go short.
Brief overview of going long or short in the context of CFD trading
If a trader believes that the price of, say, a commodity is going to increase. They will typically open a long CFD position by purchasing the CFD. If the price of that commodity does rise. The trader will sell the CFD at a higher price, making a profit.
In contrast, if the trader suspects that the price of a particular currency will decrease. They opened a short CFD position by selling the CFD. If the currency value does indeed drop, the trader can buy back the CFD at a lower price, making gains.
Increased trading opportunities and spreading risk
Traders may seek to diversify their trading portfolio by investing in multiple types of CFD. Seeing as the underlying assets vary across CFDs, a trader can enjoy exposure to different financial markets. Subsequently more trading opportunities.
Saying that it is more than just trading in a variety of markets by trading different CFDs with different underlying assets. Rather than investing in just one, the risk of making a massive loss is mitigated. This is because rather than putting all of one’s capital into one trade.
Traders will have to split their capital among different trades (different CFDs). Consequently, if one position performs badly, resulting in a loss, the trader will have other positions to fall back on.
Access to multiple global trading sessions
How to access a variety of trading sessions worldwide to optimize one’s trading strategy:
- By trading CFDs in different trading sessions. Traders are better able to take advantage of price movements in various markets across the globe.
- Unlike traditional stock markets, CFD markets typically permit trading 24/5, enabling traders to react to news and events as they happen.
- Economic releases also commonly coincide with different trading sessions. By making use of an Economische kalender, CFD traders can better align their positions with upcoming announcements or events. Increasing trading opportunities and reducing risk.
- Seeing as different trading sessions exhibit varying levels of volatility, a trader has the option of choosing which session to engage in, a decision typically based on the trader’s tolerance for risk, budget, and trading objectives.
- Traders can also adapt their trading strategy based on how busy or quiet particular trading sessions are. For example, in the instance that liquidity increases during more active sessions, more trading opportunities may arise that the trader may want to try and profit from.
Using leverage for increased exposure to trades with limited capital
Leverage is used significantly in the course of trading CFD. It’s no surprise that the question arises then as to how safe CFD trading is, seeing as how leverage can lead to substantial losses if not properly managed.
So why the popularity? Well, using leverage enables a trader to open larger trades with limited capital. But how? Well, leverage is essentially borrowed funds. Traders will borrow funds from brokers to facilitate bigger positions than what their account balance would normally accommodate. If a trade performs well, the trader may earn a much larger profit than would otherwise have been possible.
However, in the same way that leverage can amplify those sorts of gains, so too can it exasperate losses if a trade performs badly. And therein lies the risk. CFD trading is notorious for being incredibly volatile, with the risk of losing everyone’s money incredibly high. Add in leverage, and that risk multiplies exponentially.
This is why CFD traders typically make use of risk management tools to safeguard their funds. Additionally, if a trader’s account balance looks likely to fall under a particular threshold, the broker will issue a margin call, requiring the broker to fund their account. If the trader is unable to, the CFD broker will likely close the position.
Implementing a risk management plan to safeguard your money
CFD trading comes with risk, which is why its safety often comes into question. It’s also why traders usually create and follow a risk management plan to protect their money. This type of plan incorporates a variety of factors, from applying stop-loss and take-profit orders to having better control over position sizing. This may also include setting time aside to learn to ensure one’s skills and expertise are on point to handle market volatility and price fluctuations.
Risk management also includes not trading on emotion, or being driven by fear, greed, or impulsion. Emotive trading oftentimes leads to adverse trading outcomes, as rationale and common sense tend to dive. Over-leveraging and over-trading are also massive no’s. A trader’s risk management plan is typically based on the amount of capital they have available to trade, their risk tolerance, and what they’re hoping to achieve from trading.
Continuous learning and opening a demo trading account
Irrespective of one’s experience or lack thereof, ongoing learning is important to keep one’s skills sharp. It also plays a role in helping traders keep ahead of market trends and any advancements in technologies that may impact the trading experience. There are several ways for a trader to acquire a trading education, particularly online.
Depending on one’s preferred method of learning, one can choose from blogs, e-books, guides, seminars, podcasts, videos, and even Live TV. There also exists a massive online community of traders engaging in forums from which one can gain great insights, tips, ideas, and strategies.
However, as with any form of learning, ensure the educator is renowned and not promising a quick buck. The last thing you want to do is fall victim to some scam as a result of not conducting proper due diligence. Additionally, signing up for a demo trading account is another great way to learn more about trading practically.
A demo account offers a simulated trading environment in which to practice CFD trading using virtual funds. You can test out your strategies and assess outcomes to identify strengths or any potential pitfalls. A demo account is also a good way to gain confidence and expertise over time, without the threat of putting your own money in jeopardy.
CFD trading is as safe as you can make it!
Ultimately, CFD trading is as safe as you can make it. Sure, it comes with it massive risk as far as losing your capital is concerned, but the risk can be somewhat mitigated, although certainly not entirely. Trading in any form is inherently incredibly risky and more often than not results in someone losing substantial amounts of capital. This is why you mustn’t utilize funds that have been put aside for important life events like retirement, purchasing a house, attending university, purchasing your first car, etc.
Do not dip into savings. Ensure you have a budget set aside from a tradeover, where losses won’t impact your overall financial well-being.
Trading with T4Trade
Become a T4Trader and enjoy a flexible trading experience with access to CFDs on a wide range of underlying assets. This includes stocks, metals, futures, indices, commodities, and currency pairs. This leading broker also offers a wide range of trading accounts, fast withdrawals and deposits, flexible leverage, tight spreads, and fast trade executions. An incredibly helpful multilingual customer support team will also be on hand via live chat or email to assist you with a multitude of trade-related queries.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
