Mitigating the risks of CFD trading

Although there are many variations, two dominate CFDs on shares and indices (shares CFDs) and currency pairs (currency CFDs). The former allows you to make money when share prices go up or down, while currency CFDs allow shorting currencies which can be very profitable if the price of a currency goes down. Both types of CFDs can be used to make short or long term investments with risks and rewards that are potentially unlimited.

Are CFDs regulated in Europe?

While most assets have a CFD pair, there’s been a proliferation in some particularly ‘high risk’ assets such as cryptocurrencies which have pushed regulators into action. As a trader, you should be aware of the benefits and limitations of CFD trading. In January 2015, the European Securities and Markets Authority (ESMA) issued a warning about the risks of cryptocurrency CFDs. Regulators have issued multiple warnings across Europe, with Denmark being no exception.

While you’ll often hear brokers offering Bitcoin CFDs for trading, it’s essential to be aware of the specific risks – not least because these products are so new and experimental, there is no set methodology on how they should be classed or regulated.

Be aware of the risks

If you’re thinking about getting into cryptocurrency CFD trading in Denmark, then here are some risks of CFDs that you want to pay close attention to:

Understand the risks

Just like gambling on a roulette wheel, there are no guaranteed outcomes when trading CFDs. It is possible to make money if you’re lucky, but most people will lose their investment over time, meaning that you should approach this market with extreme caution. If someone offers you an easy way of making money in this space without any risk, then they are lying.

Pick your platform wisely

Cryptocurrencies can be traded anonymously, which means it’s tough for regulators to put pressure on brokers not to offer these products or even prosecute them if they do offer them. While reputable firms won’t offer these products, you’ll find that new firms will.

Understand how limit orders work

Limit orders essentially mean that you can decide when to close your position, which is essential for mitigating risks. There are two types of limit order: a) a stop loss which will automatically close your position if the market falls to a certain level, and b) a take profit which will automatically close your position once you make a specified amount of profit.

Set up stop/limit orders

Many brokers offer these features for free, but some don’t. It could be worth switching platforms because stopping your losses is an essential part of risk management across all financial instruments, not just CFDs on cryptocurrencies.

Don’t hold overnight

This can lead to significantly more significant losses than most investors expect. Unless you’re very experienced in trading CFDs, then it’s best not to hold overnight. It’s effortless for your losses to exceed any deposit you make with a broker, especially if you’re trading on leverage (where your brokers offer you additional money, which you can use to trade).

Don’t trust high returns

This is perhaps the most crucial point of all because many scammers will offer returns of 50% or more per month on investment in cryptocurrencies. If someone tells you this, they are either lying outright or using shady practices like operating an unlicensed platform. Either way, steer clear! With that said, there are plenty of legitimate cryptocurrency CFD trading platforms which offer excellent results, but you will achieve these returns over time rather than overnight.

In conclusion

If your investment fails, then your losses can exceed your deposits very easily. If you lose more than you deposit with a broker, things worsen as most platforms don’t have access to the compensation funds. They are also unlikely to refund any fees paid when making a deposit, which could leave customers out of pocket by hundreds or thousands of dollars. It’s why it’s so important to pick your broker carefully.

Check out some online cryptocurrency CFDs at Saxo.

Categories: Business

Tags: , , ,