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Risks of CFD (Contracts for Difference) Trading and Keeping Them Under Control

Among all the ways of making money online, a lot of attention is drawn from CFD trading. As real assets are used as references but not involved physically, it’s easy to do online. And due to leverages, one can make more money with fewer initial investments. But golden rules cannot be broken, so inevitable risks leave most traders broke. Let’s see what risks await you on the way and how to deal with them.

Fraudulent Brokers

Source: themoneymist.com

According to investous.com it’s probably the most common problem with amateur traders. You can lose your money because of wrong data provided by the platform, the biased algorithms used in demo and real trading, finally, because of planned issues when trying to withdraw your money. More than that: it takes some experience to sort out reviews left by real users and fake ones published just to paint the rival black. This unfair method of competition is just as popular as others mentioned.

This risk can be minimized by choosing the broker that operates in your country legally and is regulated by international industry authorities as well. You can also rely on the experience of your personal friends or acquaintances, but beware because they may really want less successful rivals. In the end, it’s all about reading people, no matter offline or online.

Wrong Forecasts

It’s the most obvious of all the risks: if you’re opening a long position but the underlying asset falls instead of rising, it causes your loss (and vice versa). This risk is inevitable: anything can go wrong on literally any market, and everybody’s gain is other people’s loss here. Climate changes reduce the need for heating. Electric cars seemingly drop gas prices, though actually, they require a lot of it for their own manufacturing. Political and religious protests can ruin the economies of countries and regions. And while technological and social trends are just very hard to predict, natural disasters are not predictable at all. The greatest minds of the XIX century could not imagine cars replacing horses on city streets. Rare sci-fi writers of the XX century who predicted the Internet still thought it would be centralized. And none of them could envision mobile phones entering our lives as they did. Who could predict, say, COVID-19? And who can now, from year to year, foresee climate changes?

How can you avoid this? There is only one answer: learn. You will never be able to make 100% correct predictions, but it’s not necessary: making 80% right and balancing your risks will do. It can even gain you the reputation of a prophet. Not only is it possible to see the current trend: the mastery is to see how changes themselves are subject to change.

Leverages: Double-Edged

Source: zophra.com

Leverages are one of the greatest advantages of the CFD trading industry: investing a little bit and making your bid work as a part of a greater one can lead you to greater profits. On the other hand, the same tool can multiply your loss (unlike binary options where both gains and losses are more predictable). That’s why on most civilized markets, maximum leverages are limited by authorities to some reasonable values. Still, even within allowed limits, you can lose more than expected if everything goes too wrong… and too quickly. So leverages are literally a weapon that can suddenly switch sides and hit you while in your hands.

Margin Calls: When the Market Drives You Out

As we have pointed out, leverages may mean the risks exceed your remaining capital. If your broker receives a signal that this is about to happen, it’s the margin call: if you don’t deposit more money, your positions are forced closed, causing you the maximum loss you can endure. Sometimes it means the end to a trader’s career, being a disappointment even bigger than the money loss.

As it can happen at any moment, you’re not only risking money. It also amplifies your FOMO, making you look at your display every minute, preventing you from sleeping well, and so on. Psychological damage, minor but constant, can lead to trauma as well. Having your risks hedged helps you improve your sleep, but you cannot stick to it fanatically, and that’s why.

Being Too Careful

Source: blockchainsummithongkong.com

Of course, all these risks called to life strategies of prevention. For example, hedging is the way to minimize these risks: if you open opposite positions of equal value simultaneously, you’re insured from losses. What you lose on one position, you gain on the other. The problem is that playing safe gets you nowhere.

To make noticeable gains, you must risk and keep some of your positions unhedged. But which, and how? You will inevitably go through some losses while shaping your strategy and gaining experience. But it should be your ratio that stands behind your decisions and does not let you slip.

Being Too Careless

It’s the opposite approach that can also get you worse than nowhere if taken mindlessly. Yes, gambling is quite a great entertainment industry, and some people can make money out of it from the player’s side. But trading and gambling may end the same with the same approach, not only because of both being a gerund but because this approach is about relaxing and trusting in your luck only.

The main difference is that the rational approach that turned out to be useless on roulette or dice pays in trading. You need to make out a strategy (as we have probably mentioned) and stick to it, varying your actions under certain circumstances but not the principles of choosing the right action.

Keep Your Mind Sharp!

Source: tradecanyon.com

There is just one way to keep the risks under control: take them seriously. Acknowledge what you can lose and plan your strategy to maximize your gains and minimize losses. And just accept the fact that you’re always at risk, so decide on how much money you are ready to spend on this sort of education… or entertainment.

If you found this helpful, you can share it on your social media pages to warn and at the same time encourage your friends, telling them about the real but manageable risks of CFD trading. You can also leave a comment down here with your story or advice.

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