Is There a Way To Trade CFDs Risk-Free?
Jun 29, 2021
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CFD or Contract for Difference is a relatively new financial instrument with the most rapidly-growing trader interest rate so far. Similar to any other financial instrument, CFD carries a certain level of risk. Are these risks a reason for you to avoid CFDs? No, but thorough risk management is what you definitely need if you decide to trade CFDs forex, stocks, commodities, or any other underlying instrument. This guide by the Forext.tb CFD experts will help see and avoid as many risk factors as possible.
1. Apply The Leverage Carefully
Placing a CFD trade, you always have to deposit a certain percentage of the full position value. This percentage is called a margin. For example, a $2,000 worth of CFDs and the set margin rate is 10%, then you need to pay a $200 margin. The margin provides you with higher exposure to the underlying asset of your position. To calculate your leverage ratio, you need to compare the total exposure to the margin. In the example above, the leverage ratio is 10:1, which is equal to a necessary margin of 10%.
The fun trick here is that the leverage can multiply your potential profits as well as the losses. If you are new to the CFD or any other market, you should be very careful with marginal (leveraged) trading. Your leverage must be lower than the part of your budget that can be spent for paying off the losses to the platform in case your prediction fails. It’s not recommended to be brave and apply high leverages if your trading capital can be wiped out after a single mistake.
Always calculate the potential loss and minimize it with low leverage.
2. Consider the Holding Costs
The truth is that the costs of holding one or several CFD positions overnight can cost you more than you actually earn within the same period. The holding cost always depends on the type of products you hold and the duration of holding. If you don’t want to trigger the negative scenarios, you should always pre-calculate the size of potential losses combined with the maximal size of holding costs. The total amount should not exceed the size of your deposited capital and should not interfere with other positions. That’s why it’s not recommended to hold positions for too long if you are not sure that there is a good chance for them to pay off.
The holding costs are always applied to your account if you hold any of your positions overnight and don’t close them before the specified time on your particular platform. The best option for beginner traders is to close all the positions within the “holding-fee-free” timeframes.
3. Mind the Account Close-Out Possibility
Your account should also have enough funds to cover margin requirements comprehensively. If you let your account balance fall below the close-out level. You have to monitor the balance all the time and invest additional funds if you see that your balance cannot cover the full amount required by the margin. If you fail to keep the balance on the right level, some or even all of your positions can be closed automatically. Platforms usually provide a close-out percentage meter so that you can keep an eye on it throughout the trading day. If your funds don’t cover the requirements at least a couple of times, you should also avoid holding your positions overnight because sharp nighttime fluctuations on the overseas markets can cause a close-out.
4. Don’t Forget About Market Volatility
The worldwide financial markets may look quite stable, but they actually fluctuate up and down multiple times within every trading day. In fact, prices for products may change at a glance while you are holding a position. This is called gapping and may drop the price of an asset down or multiply it, independently of your anticipations.
Fortunately, you can account for this risk factor while developing your trading strategy. To do this, you should review the historical trends related to your market of choice and figure out how far up and down gapping can go with particular instruments. This will give you a more or less clear idea of how to adjust your stop-loss orders when you open new positions.
Using this trading instrument, you can ensure that your positions will close automatically once the unwanted price movements are detected by the platform. This is the only way to limit this risk factor and avoid magnified losses by accident. You should request stop-loss orders even if you are convinced about your predictions.
Trade Without Hurries
Although the CFD market hides quite a lot of risks, it also has the benefits other instruments cannot offer. It means that unhurried and thoughtful risk management and market assessment may let you gain leveraged profits without even owning any real assets. Knowledge and practice will eventually show you the way to a nearly risk-free trading routine.
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