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What are the risks of CFD trading?

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CFD trading is a very risky speculation object despite its increasing popularity. The risks of CFDs should not be underestimated and should be known to every CFD trader. CFDs (or contracts for difference) are in fact a financial product based on an individual underlying asset, on whose price trend the trader can speculate.

The trader can either bet on rising prices (also called "long") or on falling prices (also called "short"). Unlike other financial products, however, the potential trader does not acquire ownership of the actual underlying asset such as crude oil, gold or the ETF in question, but merely buys into its price trend.

CFD trading itself is always free for practically every investor. For this purpose, only the registration with a CFD broker is necessary, in order to then start CFD trading via the own trading account. A great advantage of CFD trading: This is also possible with leverage! What this means exactly and what immediate risks such as margin call, overnight financing or total loss of the CFD trading has altogether, more information in the following sections.


Risk 1: CFD trading has a high risk due to high market volatility

Market volatility describes the constant price fluctuations to which the market as a whole is exposed. This includes price rises as well as price falls or sharp price drops in the meantime. Market corrections also occur regularly in open markets and sometimes cause strong price movements, which cannot always be predicted without doubt by the potential trader.

Generally, one wants volatility for CFD trading. Trading with a CFD is based on this price speculation, but thus also subject to unpredictable risks.

In CFD trading, the profits of a trade are often concentrated on the fourth decimal place (also called "pips"). Thus, even very small price changes, sometimes with great leverage, can already be traded profitably. However, if there are huge price jumps as a result of strong price fluctuations, the trader quickly runs the risk that his position will suddenly go into the red.

The dangers are thus represented by the following situations in particular when market volatility is high:

  • Slippage (unpredictable "price slides" due to political or economic events).
  • Price gaps (rolling losses due to holding positions overnight)
  • Spikes (abrupt price swings, which are quickly compensated, but immediately turn out to be very dangerous for the trader)


Risk 2: The use of too high leverage can lead to total loss

The possibility of leveraged trading is both a curse and a blessing in CFD trading. In the European Union, for example, traders are allowed to trade with a leverage of 1:30. This means that one thirtieth of the trade volume must be deposited in the form of equity (also called "margin"). The trader borrows the rest from the CFD broker during the trade.

Through CFD trading with leverage, of course, much higher profits on the invested equity can be achieved. However, in the negative case, the losses also increase immediately. Quickly it comes due to the margin call (the demand of the deposited margin of the trader from the CFD broker) so to the total loss.

The risk of trading with a CFD should therefore not be underestimated under any circumstances! According to the regulation by the "European Securities and Markets Authority" (ESMA), there is no longer a margin call obligation. However, the total loss of the capital deposited in the form of margin is still possible! In order to reduce the individual risk in CFD trading, it is therefore essential to pay attention to the correct risk management.

To estimate the risk of the lever, you can use our CFD calculator the effect of leverage and margin on your CFD position.


Risk 3: Overnight financing quickly eats up potential profits

The so-called overnight fees refer to financing costs that the trader has to pay as soon as he holds a CFD position overnight. As a rule, most positions in CFD trading are traded "intraday" (i.e.: within the day) and closed again at the latest towards the end of a trading day. However, if the CFD is held overnight, additional fees are due in the form of overnight financing. It does not matter whether the trader has taken a short or a long position.

Overnight funding accrues on both. However, it may happen that the overnight funding is positive and this is credited to the account. However, this is only the case with very few CFDs and mainly with short CFDs.

Thus, overnight funding depends on the particular CFD broker, the underlying asset and whether the CFD is long or short. For example, overnight funding for Forex CFDs is approximately 0.002 to 0.008% of the deposited margin per day.


Risk 4: Rolling losses also entail a high risk

Roll losses are another risk in CFD trading. These are costs that arise as soon as old futures contracts are converted into new futures contracts. A topic, which concerns primarily Future CFDs. In this case, there is a price difference between the old and the new contract - in the worst case, however, the trader suffers rolling losses because the new future is valued higher.

Thus, a roll has the effect of a subsequent change in the cost price of the CFD. If this was initially below the closing price for a long position, this can even be higher than the closing price due to the roll losses - or vice versa. Although roll profits are also possible, but also sensitive roll losses!

Especially traders who trade with commodity CFDs should pay attention here. Commodity CFDs often refer to the monthly futures of the respective commodity and are automatically rolled into the next future with the expiration of the futures. Good CFD brokers warn traders of an upcoming roll. This gives one time to close his commodity CFD and reopen it after the roll. This way one saves the risk of rolling loss.


Risk 5: Margin call and total loss

In order for the trader to be able to meet a potential margin call of the CFD broker, his trading account must of course be equipped with the necessary coverage. If this is not the case, the CFD broker automatically closes out individual or all current positions. This means that these are liquidated - regardless of the current price trend.

Since the markets are generally subject to rapid price fluctuations, traders should always ensure sufficient coverage of their trading account. Only in this way can sensitive situations such as interim price fluctuations or closures be best sat out, or avoided! So you should never have your entire balance (margin) in open CFDs to buffer price fluctuations if necessary. Without this buffer, you quickly get into the situation of the margin call.


Risk 6: The danger of dubious CFD brokers

Last but not least, there is the risk of entering CFD trading via a dubious CFD broker. Although the market for CFD trading is strictly regulated, there are always a few black sheep that potential traders should avoid at all costs.

In recent years, fraudulent brokerage platforms have specialized in CFD trading, binary options, forex day trading and cryptocurrencies. In most cases, traders quickly recognize the scam: The alleged brokers do not pay out profits and cannot be contacted via the specified contact options. In the meantime, the deposited capital quickly ends up in foreign accounts and is therefore no longer subject to the German deposit protection, for example.

When choosing a reputable CFD broker, traders should therefore pay attention to an existing imprint on the website, to forum opinions, to a regulation as well as to actually functioning contact options!