What are 5 Risks of CFD Trading?

CFDs, or contracts for difference, are a relatively recent phenomenon in cryptocurrency markets. Unlike regular futures trading, CFDs don’t require margin payments from the trader, and they’re not linked to any physical assets.

Because of this, many traders perceive them as less risky than other forms of cryptocurrency trading. However, a trader should know several risks associated with CFDs before investing in or using them. Traders should analyze and familiarize themselves with risks by first using a CFD demo account.

In this article, we will discuss some risks associated with CFD trading and provide our opinion on whether it’s a good fit for you or not.

Risk #1

Traders can misuse leverage to enhance gains but increase losses. While CFDs are relatively low risk when used properly, they do require traders to have the judgement to know when and how much leverage they should use in any trade.

Leverage is a tool that allows you to amplify returns, but it also makes losses more expensive because traders are trading with money they don’t have.

For example, a trader with a $10,000 capital base can control a position of up to $100,000 by using 1:10 leverage.

The potential gains or losses that this trade could yield would be the same as if the trader had put up all of his money in the trade.

To get these benefits without additional risk, traders should only use small transaction sizes. It’s also essential that they do their research to ensure that the cryptocurrency they are trading is a wise bet before investing any money.

Risk #2

Low Liquidity CFDs are products created by brokers who bring together buyers and sellers.

Because of this, there will always be some slippage when executing trades because you are not dealing with an actual order book where buy or sell orders are being matched.

Liquidity refers to the ease with which traders can get into and out of positions without moving market prices against them.

The higher the liquidity, the lower the slippage. While most cryptocurrencies have relatively decent liquidity compared with traditional forex markets, many are thin markets and therefore have higher slippage than regular Forex pairs.

If you’re dealing with a thin market where traders aren’t rushing in and out of positions quickly, then you may not get an accurate price when executing your trades.

This could result in either overpaying or underselling the cryptocurrency that you are trading, both of which will put your trading account at risk.

Risk #3

Technical Analysis isn’t perfect. Technical analysis is one of the most popular forms of analyzing charts for clues about future prices so that traders can make better decisions about when to buy or sell cryptos.

While technical analysis works very well for predicting short-term trends, it doesn’t fare so well for long-term predictions because no one has enough data to construct an accurate forecast for future prices.

Risk #4

Bitcoin price is volatile. Anytime you invest in something, you are putting your capital at risk of being lost. Bitcoin is very volatile compared with traditional currencies or other forms of investments.

Therefore, it’s best not to invest any money that you are not prepared to lose Bitcoin has very high slippage, so market conditions can change rapidly when traders all rush to exit their positions simultaneously.

This can cause significant losses if a trader isn’t careful about how much exposure they have in this highly speculative currency.

Risk #5

CFD Brokers can be shady, and while most reputable CFD brokers will act honestly and ethically, some are not so reliable.

CFD brokers are businesses that exist to make money, just like any other business. Because of this, their interests may conflict with yours in certain situations if it will affect their bottom line.

For example, we have accused some brokers of faking trading volume to attract new customers, which can be highly misleading if you don’t know what you’re looking for.

We have caught others practising insider trading by feeding privileged information about upcoming changes or trading plans to select accounts before their public knowledge.

While most reputable brokers are very ethical and act honestly, there are still many rotten apples out there who will try to get ahead by pulling a few tricks on you.