CFDs or a contract for difference is a trading toll that you can use to trade forex. It works on the principle of leverage. Leverage is the most significant reason as to why forex is risky or why people say it is so. Leverage allows you to deal in a trade with only a percentage of the amount. So if the trade deal is for $ 1000, you can get into the deal for around $ 200. Although this is beneficial as it allows you to get into big deals with small amounts, you always have to be on your toes when dealing with leverage and CFDs. The leakage factor alone is not dangerous as it in a way amplifies your loss. However, people have many misconceptions about the entire concept and they make wrong calculations leading to losses.
The Risk With Leverage
Leverage in no way means that if you invest some money, you will lose more than you invest. All it does is allow you to deal with larger sums of money that would otherwise have been out of your reach. The risk comes in when people begin to think that with leakage, they will get rich overnight or will suddenly make big bucks on a small amount. This makes people pump in more money than they should and puts them at a risk. The other risk with leveraged products is that a small price increase will result in large profits as you are dealing with a large number of CFDs, but a decrease will also mean huge losses.
How To Avoid Risk
When you trade CFDs, you have the advantage of using stop losses. Understand how they work and how they will help you so that you can put them to good use. With a stop loss, you can set a point up to which if the exchange rate falls when you will automatically withdraw without further delay. If the rate goes up, you can use the advantage of the trailing stop loss to take your previous stop loss point up in relation to the new rate. This will help you minimize losses and decide what your losses can be beforehand.
Do not go running around looking for a gold mine, this is a preliminary investment and will take time to bear fruit. So, have patience and do not keep switching mindlessly. Also, do not chase the lowest margins possible, the greater the leverage, the higher the percentage of loss.
If you have to switch your forex, trade in small CFD deals and get an idea of the new investment instead of plunging in blindly. Risks sometimes payoff but take only calculated risks. Study the market and all possible sources before going into a new deal, this will give you a good idea of its worth.
Like in speculations, never trade with the money that you need to live on or your savings. This one risk is always dangerous.
Develop a CFD trading method, when you deal with CFDs, you should have a proper method of investing that will minimize any risk to a great degree.