TELL ME ABOUT THE RISKS
Losing money is one of the major risks of investing and trading. When using CFDs this is no different. Learning about and understanding these risks and how to manage them is essential. So anyone considering trading CFDs should have a sound understanding of financial markets, risk management techniques and other risks such as the various counterparties that they may be exposed to.
A CFD holds similar risks to that of the underlying asset upon which it is based. However, as a result of LEVERAGE (one of the key features of a CFD), gains and losses will be magnified.
LEVERAGED trading increases the risk as you only need to pay a small amount of capital to open a CFD position which has a far greater notional value (or face value). Your profit or loss however, is based on difference between the full notional value of the CFD contract at the time you opened it compared to the full notional value of the CFD contract at the time you closed it. The resultant profit or loss can be a lot larger than your initial outlay. This means you can easily lose not only your initial outlay (plus or minus any profits or losses) but more. You will be liable to FP Markets if you lose more than the credit balance of your trading account.
Key risks and important issues to consider are included in our Product Disclosure Statement which sets out the risks and benefits of trading the CFDs offered by FP Markets
Managing these Risks
FP Markets offers tools for CFD traders to manage risks in trading. Outside of these CFD traders should:
- Research and understand the underlying markets
- Establish a trading plan – this is similar to a business plan and we recommend traders research and prepare prior to trading in CFDs. CFD Traders should consider things like position sizing, risk per trade, expected payout of the trade in completing this – refer to our EDUCATION sections (link tohttp://www.fpmarkets.com.au/education/ );
- Simulated or Paper trading – Take advantage of our “demo” trading accounts to test your trading plan before committing real capital – try a DEMO account now (link tohttp://www.fpmarkets.com.au/platforms/webiress/demo) ;
- Start small and test your trading plan – Once you are confident that you have a robust plan, start with a small amount of capital.
- Manage your trading – Trading requires diligence and attention. Underlying markets move quickly so you will need to manage your open CFD contracts. This will require you to regularly access your trading account to monitor your open positions and you must be able to be contacted should FP Markets be concerned about your exposures;
- Keep refining your Trading Plan – The best traders are nimble and can change their trading strategy as the underlying market changes. They cut losses quickly and use prudent risk management techniques. They never stop learning.
- Use Stop Losses and Contingent Orders – This technique will help you manage your trading account and the open CFD contracts. In the event that the underlying market moves quickly this can save you as this will automate trading if certain price events occur. Please note that in some underlying markets where prices are volatile or “gap” you may not always be able to close open CFD contracts at the prices of your Stop Loss or Contingent orders. This may mean you lose more than you had anticipated;