Risks involved in CFD trading in Asia

CFDs have been wildly popular in the UK and Europe, but their popularity has increased since their introduction to Asia.…

CFDs have been wildly popular in the UK and Europe, but their popularity has increased since their introduction to Asia. In 2014, they held a quarter of the European market share, at around 41 billion USD worth of traded assets per day.

The benefits of trading CFDs are that investors can profit from downward market movements without physically owning any assets – just by speculating on price changes. They differ from traditional options trading. They don’t give you a right over any underlying asset – just a short position with a higher degree of leverage than trading stocks or futures contracts. Due to this high degree of leverage, there is also an increased risk involved.

How much leverage is appropriate?

It’s essential for anyone looking into trading CFDs to understand how much leverage is appropriate when considering the impact of large price swings on their potential losses. It’s a common mistake for novice traders to use excessively high levels of leverage in an attempt to magnify their profits, but in reality, it usually has the opposite effect.

Using 100:1 leverage with a 10,000 USD investment will allow you to control a position worth 1 million USD. It sounds like a great deal but makes the depth and width of moves in the market against your position very unpredictable. In general, try not to use more than 10:1 leverage unless you have sufficient experience trading CFDs. Even when using 10:1, it might be wise to keep your maximum leverage below 20:1 if possible.

You need to realise that you are not trading with your money alone but also using the balance of any open positions to get exposure to changes in price. It is why CFDs are often described as a ‘leveraged product’.

Impact of leverage

The impact of leverage on potential losses can be seen when considering the following example. If you buy or sell shares worth 100,000 USD or more, then your broker will automatically require some form of a deposit to cover the risk of loss. But with smaller trades, there is no regulation governing how much he must hold back, so traders can use up all their available margin on one position.

If the market moves against them, they stand to lose more than their initial investment, resulting in significant consequences. To avoid this, many providers have a minimum margin requirement of around 1-2% for standard accounts. In other words, if your position is worth 10,000 USD or less, then the broker must set aside at least 200 USD in deposit to cover potential losses while your trade remains open when trading CFDs on capital as well as when trading CFDs on metals.

Risks with short positions

There are other risks to consider when opening short positions, such as counterparty and liquidity risks. The first type of risk occurs when you enter into financial agreements with another party, and they fail to meet their commitment under the terms of that agreement (i.e., bankruptcy). It can be an issue because cryptocurrencies like bitcoin cannot easily be defined as assets or securities under existing law, so CFDs based on bitcoins could potentially fall outside the scope of traditional regulators.

To conclude

In these circumstances, choosing where to open your position can significantly impact your total return. In some cases, it might be worth paying more for extra protection. It’s also important to remember that CFDs are always leveraged products, magnifying profits and losses. If you’re new to trading, it’s worth trying a demo account using virtual cash first before committing real money. It will give you a better idea of how a potential loss could affect your bankroll and how high the fees would have to be for this risk/reward ratio to become favourable.