CFD Risk Management

Trading CFDs is a flexible way to take a position on the financial markets. But without an effective risk management strategy, it could lead to losses.

It is vital to understand risk and learn how to manage your portfolio effectively.

Why do I need to manage risk?

Leverage

Unlike most traditional financial trading services, CFDs are a leveraged product. This means that your initial margin payment gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker for example).

Leverage is a key advantage of CFD trading: it enables you to profit from a market without having to put up the full value of the position. However, this magnified exposure also means that CFDs can result in losses that exceed your initial deposit.

How do I manage risk?

1. Understand your market

Before placing a trade, you should know your market and assess its probability for volatile movement. This is crucial in calculating the potential risk of the trade. Historically, some markets have shown a tendency to jump less suddenly, however there are others, such as equities, which are more prone to making quick, pronounced moves (often caused by profit warnings or company news).

2. Monitor your open positions

Volatile markets can move hundreds of points in the space minutes. A good understanding of your market is a start, but you should actively monitor your account so that you can react to any sudden market moves.

3. Use Stop and Limit orders

It may not always be possible to micro-manage your open positions, which is why our range of stop orders are a vital part of your risk management armoury.

The most effective way to manage risk is to use Guaranteed Stops, which, in return for an upfront premium, put a fixed limit on your potential loss without putting a cap on your profit.