How to Reduce the Risks Involved in CFDs

CFDs are designed to pay the difference between the opening price and the closing price of an underlying asset. Just like with any other trade, CFD trading encounters some risks and the main risk of this trade is the market risk as the leverage contained in margined instruments significantly increases the impact of market moves. It is this market risk that drives the use of CFDs either to hedge existing positions elsewhere or to speculate on movements in financial markets.

However, one of the ways to alleviate market risk is to make use of stop loss orders. What usually happens is that the traders deposit an amount of money with the CFD provider to cover the margin since they will lose much more than the amount they deposited if the market moves against them. If the market moves against an open CFD position, an additional variation margin is needed to sustain the margin level. Traders take this risk of positions being closed, or liquidated, sometimes at a loss which the trader is liable for, by the provider if the funds for variation margins are not provided in time.

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