Trading CFDs is a flexible way to back your judgement on a range of financial markets. However, without an effective risk management strategy, it can also lead to substantial losses. It is therefore important to understand risk and to learn how to manage your portfolio.
Unlike most traditional financial assets, CFDs are a leveraged product. This means that your initial deposit gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker, for example). Leverage is one of the key advantages of CFD trading, as it allows you to profit from a market without having to put up the full value of the position.
However, this magnified exposure also means that CFDs can result in losses that can exceed your initial deposit. As such, it is important to manage your portfolio when assessing the risk.
How do I manage CFD risk?
1. Understand your market
Before trading, it is important to understand the different markets. The key to this is knowing how volatile the market can be to establish the likelihood of sharp price movements. We have various tools, including regular Market Updates and The Week Ahead to keep you up-to-date with major financial events. TradeSense, our educational programme, will also aid you in becoming familiar with trading CFDs.
2. Monitor your open positions
An equally important risk management strategy is to simply monitor your open positions closely. Volatile markets can move hundreds of points in minutes, and while a good understanding of your market may help pre-empt extreme fluctuations, there is no substitute for actively monitoring your account. To help you manage risk without capping your potential for profit, we offer a powerful range of tools.
3. Use risk management tools
There will inevitably be times when it is impossible to keep an eye on your open positions. IG Markets' invaluable risk management tools offer a range of protection against adverse market movements, letting you trade CFDs without assuming a potentially open-ended liability. Learn more about our risk management tools.
Next steps
If you are ready to start trading CFDs, find out more about applying for an account online. As a client, you'll have access to TradeSense, our CFD education programme. It allows you to begin trading in smaller-than-usual contract sizes and with reduced commissions, helping you to potentially limit your risks while you become a more confident trader.