Risks of Trading CFDs and Stop Loss Orders

One of the positive aspects of the present-day overload of information available on the internet is that it levels the playing field to a certain degree amongst private investors. Buying or selling shares can be done online instantly and there are plenty of mechanisms to help traders mitigate the risks inherent in the market and those specific to individual stocks and derivative products.

Like most other financial products traded on margin there are a number of risks in buying and selling contracts for differences. You need to be ready to take responsibility for the stock market trades that you make, irrespective if they are profitable or not. The fact that CFDs are traded on margin means that the initial investment magnifies your potential gain or loss. Risk is generally inherently linked to reward, the riskier the investment, the higher the possible returns, however if risk is managed properly it can be considerably reduced. When trading contracts for difference this is done principally with the utilisation of position sizing, stop loss orders and straightforward portfolio hedging.

The availability of stop and guaranteed stop orders are useful tools allowing you to reduce the dangers associated with adverse price movements as they allow you to open or close positions if pre-set levels are reached thereby limiting lossing and locking-in profits in the process. If you aren't familiar with the different order types and their application, though, it's going to be very difficult for you to trade with confidence. Once you get to know your order types, you can focus all your time and energy on your trading strategy and execution. CFD providers will usually offer you a wide selection of order types including normal stop loss orders, trailing stops and guaranteed stops which allow you to manage existing open positions much more easily and proactively.

Points to note -:

• A market order allows you to buy a CFD at the prevailing price.
• A limit order allows you to place an instruction to buy (or sell) at a lower (or higher) price than the market is presently trading at. Limit orders are usually used to exit a trade at a profit. CFD traders may also want to utilise these types of orders when they are on the sidelines waiting for stock prices to move close to a support or resistance level before taking a position.
• A stop order enables you to close a CFD position below the current market price and is the main means stock market traders use to manage risk on each trade that they take out. i.e. Stop loss orders are located at a level that's worse than prices currently obtainable in the market. On a long CFD trade, the stop loss level to sell would be placed below the current market price.
• Other online order types include if-done orders and one cancels other orders. The types of orders available will depend on the CFD broker that you use, but usually these more advanced order types allow you to link different order types together to execute more of your trading strategy in one go.