Is trading CFD safe?
Are CFDs safe to trade? The short is “Yes” and the long answer is also “Yes, but it is a little complicated.” To put it another way, the dangers associated with CFD trading are more linked to the attitude of traders rather than to the nature of CFDs themselves. To ask whether CFDs are safe to trade is just like asking whether the sky is safe to fly?
Risk vs reward
In the 1990s, CFDs were launched in London as a leveraged equity swap, and were typically used by hedge funds. However, they are now available on the retail market, so why not take advantage of this instrument?
Trading CFDs is safe and secure, but just like any other market, there are certain risks and rewards associated with CFD trading as well. In general, the correlation between the return on investment and level of risk is very strong, so to earn handsome profits, one has to put significant funds at risk. The reward is higher for high-risk trades because there needs to be something enticing that makes the trader take that risk.
If you have a CFD account, but are not actively trading, your CFD account is safe, but not profitable. Each time you decide to trade, you are effectively putting some funds at risk in order to make a profit. If you trade a lot, you will risk a lot and vice versa.
The same is also true for other asset classes such as gold and stocks. Buying gold is safe as compared to buying stocks, but stocks offer much better potential return on investment as compared to gold. So, the risk vs reward ratio for CFDs is just like any other asset class.
The best articles in your mailbox
Subscribe and get essential info on trading weekly
Great! Please check your email
We've sent you an email to confirm your subscription
Something went wrong
Try reloading the page. If that doesn't help, please try again later
The appeal of CFDs is that you don’t need to trade the underlying assets. You will simply pay the difference between the buying price and selling price based on the contract. Doing so allows for much greater leverage so your opportunities of making handsome returns goes up significantly. With the upside, there is also a potential downside to leverage trading as well.
Due to this potential downside, risk management is a very important aspect of trading CFDs. Without proper risk management, you can be seduced by the idea of making a lot of money while taking a lot of risk. This is just like buying a sports car and then driving it recklessly. It is always better to be safe than to take too much risk. On your CFD trading journey make sure you are as objective as possible and you always manage your risks.
Risk is relative
Risk is something that is relative and everyone can have a different definition of it, as well as different tolerance for risk. You need to understand that risk is always closely related to reward so in most cases the higher the risk, the higher the reward. CFDs are no riskier than any other market but your trading attitude will have a big impact on whether you will make a profit or lose all your investments. Successful traders may even argue that trading CFDs is more about risk management than looking to make successful trades. You can use powerful tools such as technical analysis, probability and statistics to limit your exposure, while simultaneously increasing your profit ratio.
The right attitude
Whether CFD trading is safe or not also depends on the attitude of the individual trader. If you are a trader with a positive outlook and can-do attitude, you can make some serious inroads in the CFD trading world. If you have selected a reputable broker or a trading platform, did some research on your own, choose your leverage limits carefully and managed risk properly, there is no reason for CFDs to be riskier than any other asset class.
So, to sum things up, we can see that trading CFDs is neither safer nor riskier than any other asset. The difference is all in your trading attitude, your risk management and your tolerance towards risk. If you make your trading decisions wisely, there is no excessive risk for you. Always practice safe trading strategy and always stave off the seduction of trading excessively with poor risk management. Trading is not a sprint, but a marathon and if you develop this attitude towards CFD trading, you can make some serious impact.