One of the reasons why traders are attracted to CFD trading is that it can be traded on margin. In CFD, margin trading allows leverage on the trading account for a portion of every trade. Although it might look and sound confusing at first, understanding it is the key to having the right trading decisions. The margin is calculated based on the degree of leverage that is applicable to a particular trade. Most of the time, this percentage is fixed based on the instrument and the market. This percentage is paid upfront by the trader.
Examples of How Margin Works in CFD Trading
For instance, FSE 100 can be traded after paying a margin requirement of 5%. For you to take the exposure, you need to take on a 5% margin, pay it upfront, and get as much as 20 times loaned capital from your broker. If you have paid the 5%, the remaining 95% is the borrowed funding. For the $100 capital that you have, you can take up as much as $2,000 for your capital. If the market goes up by 10%, then you will get a $2,200 return. The $200 will be your profit after deducting the leveraged amount. Margin increases the size that you can take up while ensuring that you get a better return.
Margin in CFD is notional. This isn’t negotiable as the terms are already set and the funding gets automatically approved. As long as the condition to pay the 5% margin is met, you can have the borrowed amount automatically deposited into your trading account.
But during the worst-case scenario, if you cannot handle the leverage properly, you will end up with debts much more than the capital you have deposited. This is how leverage works, not just in CFD trading but also in Forex trading. The dangers posed by leverage can even get out of hand. For this reason, you need to employ a risk management strategy for each of your open trades to avoid such circumstances from happening.
It is true that the advantages of leverage will make you want to have it as soon as possible. The huge gains without the need to spend so much are everyone’s dream. But the reality in life is that everything doesn’t run smoothly as it is. In fact, not just in CFD, all other types of investments take on risks that are unimaginable but controllable through the use of proper strategy and plan.
Even if you are someone with wide experience in trading, there’s still a possibility of ending on the bad side of it because nothing is guaranteed in the trading world. You cannot force it to avoid losses and only take up gains. In trading, losses and gains are married to one another.
All you have to do is accept that losses are normal and do something to minimize them as much as possible. And the only way to minimize the risks is to employ a good risk management plan, be knowledgeable and stay updated with the latest economic news.