Is CFD Trading Safe?

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Let’s put it this way: Trading with CFDs can be safe. However, for a lot of people, the appeal is precisely the risks associated with it. Maybe skiing would be a good analogy. Is skiing safe? Well, are you in a well-maintained easy route, or are you an adrenaline junky careening down the side of a hill? So it goes with CFDs.

There are a couple of aspects of safety that are important to keep in mind. In fact, keeping safety consideration as an important part of trading is often seen as the basis of success in trading CFDs like Forex. It has to do with some principles of basic investment strategy.

Risk and Reward

In general, there is a strong correlation between the level of risk and the return on investment. More profitable investments generally imply a higher level of risk (but, importantly, not necessarily vice versa). This is because, in order for someone to engage in a more risky investment, there has to be a higher return on the investment to make the risk worthwhile.

If you have a CFD account and never trade, well, that’s very safe. But not profitable. Each time you trade, you are taking a risk, but you could make a profit. If you trade a lot, you will be taking on more risk, but, presumably with the objective of making more profit.

This applies to asset classes. Buying gold is relatively safe. Buying stocks is significantly riskier. But stocks pay dividends, which means you could make more money. Leverage, where you borrow money to make larger investments, increases how much money you can make, but also increases how much you can lose.

Risk Management

The appeal of CFDs is that you don’t trade the underlying asset, but a contract for the difference between the price when you buy and the price when you sell. They allow for significantly more leverage, so you have the chance of making more money, while accepting an increased risk than if you just bought the asset outright.

Because of this, risk management is a fundamental (if often less appealing and therefore more forgotten) aspect of CFD trading. Because a lot of people can be seduced by the idea of making a lot of money with CFDs, many take too many risks when trading – sort of like people who buy a sports car and drive too aggressively. It isn’t that the sports car is inherently less safe, but that the people who are motivated to buy one are more interested in risky driving. Because of this, some places like the US simply ban CFDs.

Risk is Relative

Understanding that risk is intimately related to profitability, you can manage your risk levels to suit your personal preferences and abilities. You can adjust how often you trade, how much money you put in, how much leverage you have, how much thought you put into a trade. You can study up on how to manage risk, and administer your money. All of these are important elements of CFD trading that make it safer.

Many traders have argued that CFD trading is actually more about risk management than looking to make the most profitable trades. Trading for them is a numbers game, where you use probability and statistics to offset your exposure and reduce your risk without compromising your profitability. The argument is that CFD trading is all about safety, and finding the safest way to make a profit.

The Right Attitude

How safe CFD trading is depends often on what you are trying to get out from it: The more profitability, generally, the more risk. The more risk, the more you have to pay attention to safety. Once you’ve selected a reliable, reputable broker, how safe your CFD trading will be depends primarily on how you trade, how much attention you pay to your risks, and how well you are at managing your money.

There are many resources online and on this site that can help you stay profitable while reducing your risk. The more you know about trading safety and risk management, the more you can control your exposure and decide how safe you want to be when trading.

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or practice on DEMO ACCOUNT

Trading CFDs Involves high risk of loss

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