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CFD RisksDo you understand the risks with CFD Trading?Whilst the majority of this site is dedicated to showing the positive aspects of CFD Trading, it is important to keep in mind the CFD risks that lie lurking around the corner when trading this exciting product. By being aware of the CFD risks you can better arm yourself with appropriate trading strategies that enable you to avoid or minimise the risk that CFD trading poses. Now if you have been trading for any length of time you would have come to the realisation that trading involves your emotions, mainly fear and greed. In fact fear and greed are exactly what drive the worlds markets on a day to day basis. Having said that, most of the CFD risks are the same fear and greed emotions that fuel problems in sharetrading, forex trading or futures trading. If you can overcome your emotions you will be taking huge steps to becoming a more successful CFD trader and avoiding the common CFD risks. Top 6 CFD risks to watch out for
Overtrading is a silent killer to any trading account. Many people who overtrade are able to stay at breakeven for a length of time and some can even be slightly profitable, but unfortunately many end up in a losing rut, unable to climb out. The main culprits to overtrading are:
'There are old traders; and there are bold traders; but there are no old bold traders' New traders are often warned that the worst thing they can do initially is have a number of wins early in their trading career. Winning too big and too soon for many would appear to be a goldmine but remember the Fear & Greed we were talking about earlier? Here is a snapshot of what is likely to happen following some big fat profitable trades.
Now this may not have happened to you but surely you know a trader who has done this.
Hopefully the CFD risk here stands out like a flashing neon sign but in case it doesn’t then let me give you a hint. Shares, CFDs, Forex, Futures and all financial markets have the ability to continue rising for a lot longer than you have capital to fund margin loans. Have a look at Berkshire Hathaway’s stock price at over $US130,000 a share. What if you thought it was ‘expensive’ at $20,000 and decided to short it? Ouch. Say goodbye to that retirement plan. There is a very old saying: “The trend is your friend...until it bends at the end”. Don’t fight the trend, especially on leveraged products like Contracts for difference or else you’ll end up owing a lot more than what you first anticipated. Don’t marry yourself to a market call. If you are wrong and you attempted to short sell against the trend, be aggressive with your stops. Get out.
Not everyone who trades leverage products like contracts for difference (CFDs) or options fully understands what they are doing. To compound this they take their extensive research on technical analysis (Technical analysis for Dummies) and attempt to pick the market and trade a product that they don’t fully understand the risks of. Surgeons, Vet’s and most professional occupations take years of study and practice before you actually get to work with real patients or clients, so why should trading the markets be any different? Thoroughly research all trading products, trading instruments and understand the risks before jumping in head first.
CFD Leverage is one of the most exciting things to happen to trading in a long time. Leverage has always been around but it has never been on a product that is so simple to understand. Options require an understanding of the Greeks, time expiry, time decay, which option series to choose. Futures have expiry dates, physical delivery if you are not careful (imagine getting a couple of tonne of pork bellies arrive at your doorstep!) and don't try trading futures without an experienced broker or else you'll pay the consequences! Trading contracts for difference are just so simple. You take a $10,000 position in a stock like Telstra and you generally only need around $500 or 5% margin. No time expiry, no time decay, no Greeks and no physical delivery. The CFD risk posed here is when you start winning and then increase the CFD leverage you have. This can be potentially disastrous and could in fact wipe out your account, if not more. Click here to read the full article on how to use CFD Leverage
This is the by far the biggest CFD Risk that you need to be aware of. CFD trading, like most derivatives, opens you up to potentially significant losses. In fact, when CFD trading you may start with $5,000 in trading capital but take out a $100,000 CFD position. The market may move significantly overnight and as a result the market gaps against your position by 10%, leaving you with a total position loss of $10,000. Now your $5,000 has been wiped out and you now owe $5,000 to your CFD broker. You can be assured, that $5,000 cheque is not one you want to be writing, EVER. Always trade within your means and don’t gamble your account. Opportunities are everywhere when trading the markets, but if you have wiped out your trading account then you won’t see a nickel of profits by sitting on the sidelines with negative equity. CFD risks are very real and having a bit of back ground knowledge before jumping into the CFD frenzy could save you thousands of dollars. Trade Smart Understanding the importance of portfolio
management Disclaimer: Trading Contracts for Difference carry risk where you can lose more than what you start with. View our full disclaimer here. |
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