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Like all financial products there can be risks in buying and selling CFDs. Risk is generally linked to profits, the riskier the investment the higher the potential returns, however if risk is managed properly it can be significantly reduced. When buying and selling CFDs this is done with the utilization of stop-loss orders and straightforward portfolio hedging. This article explains the key risks linked to trading CFDs and what is generally done to reduce them without having an impact on the substantial profits that CFDs can offer.

Prior to trading CFDs you must recognize that CFDs are a leveraged product and can work for you in addition to against you. Similar to all leveraged products a small price change can result in large returns and also sizeable losses. The diversity of order types offered to CFD traders allow the dangers connected to adverse price movements to be considerably reduced as CFD traders are able to set their order at a price which they are prepared to close out their position and realize a loss. Common order types used to alleviate risk are stop-loss orders, trailing stop-loss orders and guaranteed stop-loss orders.

Stop-loss orders
This is certainly one of the most popular order type utilized by traders to deal with risk. A stop-loss order is basically an order to shut an existing open position that is positioned at a price underneath or above the current market price. The order is placed at a price that the CFD trader is willing to close out their open position. It’s imperative to note stop-loss orders are usually susceptible to slippage should the price of the CFD gap, this is a common occurrence when trading share CFDs.

Trailing Stop-loss orders
Trailing stop-loss orders are similar to stop-loss orders with the exception that the price of the order moves in accordance with a pre-determined distance from the current trading price, this distance is set by the trader at the time of placing the order. It is essential to note that the price of the order will only alter if the price of the instrument moves in a favorable direction, should the price move against the trader the price of the trailing stop-loss order won’t vary. This order type works like a ratchet, in that it can be utilized to lock in profits as the position moves in favor of the CFD trader without the need for the trader to regularly change the price of the stop-loss order.

Guaranteed Stop-Loss orders
Guaranteed stop-loss orders have grow to be commonplace in recent times as a result of traders having the ability to predetermine their losses. This order type is generally used when trading share CFDs simply because share CFDs are prone to slippage and gapping in the opening phase of the market. It’s vital to note that when using guaranteed stop-loss orders your CFD provider will often charge you a premium, this is exactly like an insurance premium guaranteeing that you’ll be filled at the price your stop-loss order is placed.

Aside from using orders to control your risk when trading CFDs many traders use other financial products such as shares and options to hedge their CFD positions.

Shares are usually utilized to hedge CFD positions or vice versa, these are often utilized by traders that hold a portfolio of stocks in addition to a short term CFD trading account. CFDs are used to trade the short term price movement of the stocks within their portfolio without needing to sell the stocks and realize any capital gains.

Options are used by a number of CFD traders as a form of guaranteed stop-loss. Options have a bonus over guaranteed stop-loss orders in that they’re often inexpensive. Hedging CFD positions using options is a common strategy employed by more advanced traders that understand the core components of an options contract and understand how to pick the most appropriate contract to hedge their CFD position with.

Other than managing risk using order varieties and hedging strategies all CFD traders ought to make certain that they adopt strict money management strategies, meaning that they should not utilize excessive leverage or over expose themselves to one individual CFD or sector. Utilizing excessive leverage is the single most common mistake made by novice CFD traders.

Prior to opening a real CFD account you should make sure that you practice trading on a demo account to so that you are familiar with how to make use of the many order types available that will help you manage risk. Bear in mind CFD trading can be extremely satisfying if the risks are controlled.