There are certain risks involved in CFD trading and there is no guarantee that you will trade and make profits. As in any other business field, the higher the risk levels the higher the returns. You don’t need to worry about the risks involved in this type of trading. The risks can be reduced if the risks are managed properly.
Managing Risks In CFD Trading
You can manage your risks through simple portfolio hedging and a variety of orders. Before starting with CFD trading, you have to understand the fact that CFDs are a leveraged product and that leverage can either for you or against you. Just as with all the other leveraged products, a small price movement can either earn you profits or losses.
To reduce the risks associated with adverse price movements you need to use a variety of orders. This gives the traders the chance to set their orders at a price they are prepared to close out their positions and make a lose. The most common types of orders used to mitigate the risks are trailing stop-loss orders, stop-loss orders and guaranteed stop-loss orders.
This is the most common order used by traders to manage risks. It simply involves closing an open position placed at a price above or below the market price. A stop loss order can at times be subjected to slippage in case there is gap in the CFD trading price.
Trailing stop-loss orders
These types of orders are very similar to the stop-loss orders only that the price of the order moves according to a pre-determined distance from the market price. It is the trader who sets this distance when they are placing the order.
The price of the order will only change if the instrument price moves in a favorable direction. The price of the trailing stop order will not change if the price moves against the trader. It can be used to lock the profits when the position moves in favor of the trader without having to change the price of the stop-loss order.
Guarantee stop–loss orders
These types of orders have become very common due to the fact that it guarantees the traders of their potential losses. It is used in CFD trading since share CFDs are prone to slippage and gapping during the opening of the market. When you decide to use guaranteed stop-loss orders, you will have to pay a premium to your CFD provider. This premium works in the same way, the insurance premium works in that you will be filled at the price that your stop-loss order is placed.
Apart from using the orders to help you manage your risks, you can also use other financial products like options and shares. Shares are mostly used to hedge CFD positions or the other way round. They are used by traders who hold a portfolio of stakes or those traders who want to use it as a short term trading account. With this option, you can trade short term price movements of the stocks within your portfolio.
Options are used as a form of guaranteed stop loss orders by some CFD traders. Options are often cheaper than stop-loss orders. Hedging CFD positions using options is mostly used by sophisticated investors who understand options contract well and how to choose appropriate contracts to hedge the CFD position.