If there are advantages to trading CFD, there are also disadvantages caused by the lack of knowledge in using this trading platform. One of the risks involved in CFD trading is trading in a highly volatile market. This is such a highly risky way of trading. Although it is nice seeing the good thing about CFD, how it can benefit you financially, it is also important to check its disadvantages so you can keep track of it and avoid it totally when such circumstances come along the way.
What are the risks of CFD?
It is important to know that CFD is extremely risky just like Forex trading. We’ve known all sorts of rewards that you can get with CFD trading but behind all these, these are less spoken downsides of CFD. After all, no one wants to destroy the anticipation of many by bringing up the risks and disadvantages posed by this trading instrument. But if you want to protect your capital, you also need to know these crucial factors before you put in your trading capital. CFDs are known to be highly leveraged. This means that despite losing on your trades, you are still liable for the losses that you got out of the leverage.
Leverage goes on top of the list of disadvantages in CFD trading. As ironic as it seems, leverage is also the most important advantage of CFD but it can also be its most notable downside. With leverage, if you are not careful enough in handling it, you might end up creating havoc on your funds. Although there are cons in CFD, there is also a huge percentage that points out in favor of its benefits.
Aside from the losses that leverage can bring forth, you must also be wary of the high risk in CFD. Even if you see a drop of points in the market, you will still need to cover the leverage part of the deal in addition to the already high funding costs or the capital damage which was sustained throughout the trading course. CFD has become riskier due to these things.
Overtrading Might Happen
Above all the disadvantages, trading CFD is known to be a low-cost way to enter the market. This might result in overtrading. When you say overtrading, the trader exposes his portfolio in the market until such time that his remaining capital becomes insufficient in covering up the losses. If trading is cheap, traders tend to trade mindlessly without realizing that sooner, he will face losses in their capital. In the case of multiple positions heading south, this could mean that a disaster is underway especially if you are not having a cautious approach.
Cost of Overnight Financing
In CFD, the shorter the trading term, the better. This is all due to the fact that overnight financing costs too high. In CFD, if you maintain a position overnight, the cost is being calculated on a daily basis and it will surely mount up if you hold the position for weeks and months.