CFD Trading Risks | What are the risks of CFD Trading?

Trading CFDs is a flexible way to back your judgement on a range of financial markets. However, without an effective risk management strategy, it can also lead to substantial losses. It is therefore important to understand risk and learn how to manage your portfolio effectively.

Why do I need to manage risk?

Leverage

Unlike most traditional financial trading services, CFDs are a leveraged product. This means that your initial deposit payment gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker for example). Leverage is one of the key advantages of CFD trading, as it allows you to profit from a market without having to put up the full value of the position.

However, this magnified exposure also means that CFDs can result in losses that exceed your initial deposit.

How do I manage risk?

Understand your market

Before trading, it is important to understand the market on which you are taking a position. Knowing the potential for each market to experience volatility and establishing the likelihood of sharp price movements is essential when considering the risk associated with each trade. For example, historically, some markets are less likely to make sudden discontinuous jumps, while others, such as shares (which can be subject to profit warnings and other news), may be more likely to make abrupt movements.

Monitor your open positions

An equally important risk management strategy is simply to closely monitor your open positions. Volatile markets can move hundreds of points in minutes, and while a good understanding of your market may help pre-empt extreme fluctuations, there is no substitute for actively monitoring your account.

To help you manage risk without capping your potential for profit we offer a powerful range of tools.

Using Stop orders

A non-guaranteed Stop will trigger an order to close your position once the selected level has been reached. However, you should be aware that it will sometimes not be possible for the Stop Order to be transacted at the price you have selected. This may happen overnight or when the market moves very quickly. In these cases the Order will be transacted at a worse, and sometimes much worse, level than you have selected. This is known as 'slippage', and is determined on a basis which IG Markets believes to be fair and reasonable. For more details on slippage see our CFD glossary.

Trailing Stops are non-guaranteed, but track your position while the market moves in your favour, providing protection if it starts to move in the other direction. This allows you to lock in profits without the need frequently to re-adjust the level of your Stop.

Using Limit orders

A limit order triggers an order to close once a specified market level has been reached. It is an instruction to take profit if prices move in your favour. This means you can realise a pre-selected level of profit, even if the price later moves against you.

Stop and Limit orders are available over the phone as well as online, meaning you can manage risk wherever you are.

If you're ready to start trading CFDs now, you can open an account online in minutes.