Trade Responsibly – Understanding the risks involved
Contracts for Difference (CFDs) are derivative instruments that allow traders to speculate on the changing values of an asset without taking ownership of that asset. Due to their complexity, trading CFDs carries a high level of risk, particularly for first-time traders or investors who are not well-educated about the markets.
Learning about the markets and understanding the risks involved does not entirely eliminate the risks inherent in CFD trading, but it may help you make more informed decisions, manage your invested funds more effectively and employ adequate risk management.
If you are new to trading, visit our Getting Started page and register for a demo account to learn the basics. Demo accounts are free and unlimited and are designed to help you practice trading or test your strategies in a risk-free environment.
How to use leverage to your advantage
Trading with the use of leverage enables traders to control positions that exceed the value of their initial investment. If, for example, you deposited $1,000 into your account, trading with a 1:200 leverage would allow you to control a $200,000 position, which would maximize your profits, were the market move in your favor.
If, however, the market moved in an unfavorable direction, leverage would increase your losses. To familiarise yourself with trading with the use of leverage, you may open a free demo account and see what leverage best suits your strategy.
The keys to effective risk management
Proper risk management is essential in the world of trading. There are a number of things you can do to ensure that you manage risk effectively:
- Invest a number of funds that you would be prepared to lose, should the market move unfavourably.
- Invest in a number of assets in order to spread your risk. Many traders, for example, often invest in Futures Contracts to manage the risk from other positions they have open.
- Trade according to a strategy. Try to refrain from placing trades on impulse and pay attention to socio-political events, as well as economic indicators, that may have an impact on the price of specific assets.
- Carefully use Stop Loss and Take Profit orders to minimise losses.