Posted by becky on December 23rd, 2019
Contracts For Difference are an attractive instrument for traders looking to diversify their portfolio on a number of counts because they provide leverage to amplify potential gains. However, CFDs carry their own disadvantages and it is necessary to pay attention to the potential dangers associated with trading Contracts For Difference.
The primary drawback involved in trading CFDs is the potential for significant losses. Leverage can be a fantastic tool but it can have disastrous consequences when markets move against you, and it is often the ruin of inexperienced, proud or overzealous traders. It is important to remember that leveraged positions can go up and down, and your entire deposit balance is vulnerable to the dreaded margin call.
When you are trading with Margined CFD products it is necessary to work with tight stops (using smaller intervals when defining the loss limit on a position). This prevents unsupervised runaway positions clearing out your bank balance. While the upside gains are tempting you need to keep a cool head and a realistic perspective to minimise your losses and develop a profitable and consistent trading strategy.
What is Trading CFDs on Margin?
CFD trades are margin-based transactions with the gain/loss being set by the difference between the opening CFD price and the closing CFD price. Margin refers to the deposit that you, the Forex Trader, must provide in order to open a position.
Margin money is essentially a guarantee that you the trader will honour your contract with the broker. Margin is based on risk levels and on what it would cost to buy the CFD investment at its full price. By trading on margin, the trader can create significant opportunities because he only has to use a minimal deposit to hold a position and manipulate it. Basically the investor is acquiring a larger exposure to a particular CFD commodity for a reduced amount of money.
Therefore, Margin is the minimum deposit you are required to make by your CFD provider in order to open your CFD trade. The financial amount required for you to initiate a new position is referred to as ‘Initial Margin’. Initial margin is usually set at a percentage of the value of the contract being traded.
CFDs can be a great add-on to your existing trading and there are many benefits available when you include these instruments as part of your portfolio. It still remains of vital importance to fully understand the risks of trading CFDs and to minimise the potential for losses and strategically build your portfolio.Also See: Trading Cfds, Traders Looking, Initial Margin, Cfd Price, Margin, Cfd, Trading
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