According to the financial watchdog of Hong Kong, The Securities and Futures Commission (SFC), many retail investors are at risk of losing their entire investment. This is because of high-risk trading in Contracts for Difference (CFDs).
CFDs are derivatives that allow traders to gain exposure to an underlying asset without owning it. Traders can use them to speculate on price movements or hedge against current positions.
On the other hand, retail investors often use cfds to bet on daily price action rather than hedging purposes. Most turn over large amounts of money in a short period on these tradable instruments. A single trade could result in significant losses or gains depending on market movement, making them more suited for professional traders.
Risks involved when trading CFDs
There are several risks involved when trading CFDs, including the possibility of losing more than your initial deposit due to leverage which magnifies both profits and losses. In addition, investors using CFDs may incur brokerage costs and commissions. Therefore, retail investors need to have a proper risk management strategy before opening a CFD account with the broker.
An excellent way to reduce risk is by defining a clear money management plan that will help them avoid riding on a “gambling high”. You can do this by determining how much they want to invest per trade or day, setting limitations such as the percentage of buying power or base currency, and restricting the number of active trades they open. A good money management plan will help them avoid getting into a “gambling high” or keep them from taking on too much risk.
Risk management techniques for CFD trading
Though there are more instruments involved with CFD trading than traditional forms of financial market trading, such as bonds or stocks, the main aim is to make gains from price movements between different assets like currencies, commodities, or indexes. The main benefit of CFD trades is that they can be entered and exited at a fraction of the total investment amount if you are using leverage.
So what does risk management involve when trading CFDs? In simple terms, it means hedging against market volatility to protect any existing gains plus worrying less about small losses in a given trading day or week. Of course, this doesn’t mean ignoring price movements completely but taking a more long-term approach instead.
If you trade CFDs, understanding how risk management works and making sure you use tight stop-losses is essential if you don’t want to face any accusations of market abuse yourself.
As with all forms of financial market trading, risk management in CFD trading is essential to avoid any abuses or accusations of market abuse by regulators and existing clients. Make sure you understand these risks before opening a position and always put stop-losses on open trades to limit further losses that can occur if volatility comes back strongly. This will help protect existing gains and reduce stress levels throughout the day.
Using a CFD broker
CFD brokers offer pricing with lower spreads on some pairs, but their trading conditions might not necessarily be attractive for investors because of higher margin requirements. Therefore, it is essential to check the trading conditions before signing up for an account.
Currently, very few retail traders in Asia use CFDs due to a lack of knowledge about these instruments and the associated risks involved. The SFC has developed educational materials in both Chinese and English for retail customers interested in learning more about CFD trading.
One common mistake for beginner CFD traders is taking significant losses due to risky trades. This can be easily mitigated by having a solid risk management plan in place. This is why it’s important not to get stressed when dealing with losses and stay calm. Just remember your risk management strategy. New investors should use a reputable online broker like Saxo Bank; for more information, check this here.