If you’re considering getting into CFD trading, you must know the risks involved. Although CFDs can offer some great opportunities for making money, they can also be risky. That’s why taking steps to reduce the risks associated with CFD trading before you start is essential.
What are the risks associated with CFD trading in the UK?
There are several risks associated with CFD trading in the UK. These include:
The risk of losing money
When you trade CFDs, you’re essentially betting on the price of an asset going up or down. If the price moves against you, you can lose money. And, because CFDs are leveraged products, you can lose more money than you invested, which is why it’s crucial to have a stop-loss in place to limit your losses.
The risk of not being able to leave a trade
When you trade CFDs, you enter into a contract with a broker, which means that if the price of the asset moves negatively against you and you want to get out of the trade, you may not be able to do so because your broker may not be willing to repurchase the CFD from you at the current price. Make sure you choose a reputable UK broker who will give you the option to exit a trade if necessary.
The risk of counterparty default
When you trade CFDs, you’re also exposed to counterparty default risk. This risk is where your broker fails to meet its obligations under the contract. For example, if they go bankrupt or refuse to honour a deal. While this is unlikely to happen with a regulated broker, it’s still something to be aware of.
The risk of market manipulation
Another risk associated with CFD trading is market manipulation, where people or groups attempt to artificially move the price of an asset in a particular direction. Traders can do this for various reasons, such as to make a profit or to cause havoc in the markets. While market manipulation does occur, it’s generally not a big problem in the UK.
The risk of political or economic instability
You’re also exposed to political and economic risks when you trade CFDs. For example, if there’s a change in the government or a country goes through a financial crisis. These events can significantly impact the markets and, as such, your ability to make money from trading CFDs.
Four tips on how to reduce the risks associated with CFD trading:
Here are four tips on how to reduce the risks associated with CFD trading:
Make sure you know what you’re doing
The above might seem like an obvious point, but it’s worth reiterating. Before trading CFDs, you must understand their work and their potential risks. If you don’t know what you’re doing, it’s easy to make mistakes that could cost you a lot of money.
Use a reputable broker
When it comes to CFD trading, not all brokers are created equal. Some brokers are much better than others when it comes to things like customer service, fees, and the overall trading experience. Always use a reputable broker from Saxo Capital Markets that you can trust, which will help to reduce the risks associated with CFD trading.
Don’t over leverage
One of the biggest mistakes new UK traders make is over-levering their positions. When you over-leverage, you’re essentially borrowing money to trade, which can amplify your losses if the trade goes against you.
Use stop-losses
A stop-loss is a trading order you can place with your broker to close your position automatically if it reaches a specific price. This order is a valuable tool for managing risk because it means you won’t lose more money than you’re comfortable with if the trade goes against you.
Conclusion
CFD trading is high-risk, but there are ways to minimise the risks. Make sure you understand what you’re doing, use a reputable broker, don’t over-leverage, and use stop-losses. If you do all these things, you’ll be in a much better position to trade safely and profitably.
