Contracts for Difference: Volatility Risk

The risk is exacerbated in particularly volatile markets that are subject to sudden and dramatic price moves. When trading individual equities or commodities for instance it is particularly important not to take too big a position. Traders who ignore this could find that adverse price movements give rise to substantial additional margin calls at short notice. If the funds can't be produced in time then the trade may be closed at a loss with the client legally liable to make good the resulting deficit. The worst-case scenario when trading shares is that they lose all their value thereby rendering the investment worthless, the upside being that the loss cannot exceed the stake. A CFD in contrast creates an additional contingent liability since the potential losses are not confined to the initial margin and may require additional capital to make up the shortfall.

 

The onus is really on the trader to appreciate the risks and to adopt a disciplined approach to control them.

Getting Locked in

Another easily overlooked factor is that under certain trading conditions it may be difficult or impossible to liquidate a position, the prime example being when trading is suspended. It should also be remembered that CFD transactions are not undertaken on a recognised or designated investment exchange. They are over-the-counter derivatives that take the form of an agreement between the client and the provider and as such can only be closed with that same provider. Traders who find themselves over-exposed and having to exit a position may find the spread widen against them in response to the unfavourable underlying market conditions.

 ...Continues here - Trading in Volatile Market Conditions

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