When trading with leverage, just like in traditional trading, the market may move against you as well as in your favour. This means whenever you trade, you’re at risk of losing money.
Your risk can be magnified in a number of ways.
CFDs are leveraged products, which means you can place a relatively large trade with a much smaller deposit.
However, any profits or losses you make will be based on the full value of your trade – so could be much greater than your initial stake.
So while it gives you greater flexibility, leverage also means you need to be particularly careful not to risk more than you can afford to lose.
When the price of a market swings up and down vigorously, it’s considered a volatile market. Volatility can prove a good way to earn some big profits, but it can also substantially magnify your risk.
You need to keep in mind that if a market moves against you, you may not be able to react the instant it starts to do so. In fact, you may get hit with a sizable loss before you even have a chance to close your bet.
It might turn against you with a lot more momentum than you expect, or you might experience a sudden jump (or 'gap') as the market skips from one price to another. This is especially likely if you leave a trade open overnight or over the weekend, since the price when the market opens might differ significantly from its previous closing price.
If you haven’t taken the time to prepare, you’ll go into any trade needlessly adding to your risk.
You need to make sure, for example, that you’ve made an informed selection in the first place – that is, whether the risk of the trade justifies the potential reward at the end of it. So it’s key that you make sure you understand your market.
There are a number of other common mistakes to watch out for that could also increase your risk – failing to follow a plan, for example, or misunderstanding trends.
However, there are a number of ways you can manage the risks associated with of trading.