CFD risk warning at XM explained

Hi, we are BrokerChooser here, we help you make sense of the financial world. When it comes to CFD trading, you often see different risk warnings on our page for brokers, as is the case with XM. It warns you that X percentage of retail investor accounts lose money when trading CFDs.

But what exactly does this risk warning mean? Should this stop you from trading CFDs at XM?

• The publication of appropriate risk warnings are regulatory requirements, for example for brokerage service providers in the EU and the UK offering CFDs.
• They indicate that CFD trading is highly risky and make retail traders aware that they can lose money, by disclosing up-to-date data on the percentage of retail accounts losing money at the broker in question when trading CFDs.
• However, this should not prevent you from CFD trading, once you are aware of and understand the risks involved in CFD trading.
• Once you have a good grasp on CFD trading, you should think about choosing a trusted and high-quality broker offering CFD trading at competitive fees.
• We at BrokerChooser only recommend providers that are regulated by at least one top-tier, trusted authority, which means these brokers are legit.

So you shouldn't worry about CFD trading with XM, if you understand and are aware of the risks and know how to mitigate them.

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71.61% of retail CFD accounts lose money

Read on if you want to dive into the details on what these risk warnings actually mean, and how they are calculated. We also checked if XM allows you to set your leverage manually.

OK, so you know that CFDs are essentially contracts you enter into with your broker to speculate on the price of the underlying asset. CFD trading is a risky business that requires lots of self-awareness, risk management, and knowledge of the markets.

Risk warnings are mandatory in certain jurisdictions such as the EU and the UK to make sure you don't forget that. Including them in any information about XM's CFD offerings is a requirement by the regulators of the financial market in the EU and the UK.

In the case of XM, this is the risk warning:

Data updated on December 10, 2024

This warning shows the percentage of clients at this broker losing money based on their CFD trading. However, it does not take into account how much money these clients have lost or won on their CFD trading - a few pounds or millions. It also does not describe the entire client base at XM, whether their accumulated account is in the positive or in the negative.

The percentage shown in the risk warning doesn't mean that this is the probability of you losing money. It indicates that CFDs are high-risk products. Whether you lose or gain money depends on your knowledge, trading and risk management strategy and the market movements.

You might be interested to know that when you lose on a CFD trade, it doesn't mean the broker is making money on it. Brokers generally make money on charging different types of fees and commissions on your trade.

Let's see what the regulators expect providers to disclose.

According to the regulatory requirements laid down originally by the European Markets and Securities Authority (ESMA) in 2018 covering the EU market (and later adopted by the majority of national competent authorities in the EU), the risk warning should include an up-to-date loss percentage at the broker, based on a calculation of the percentage of retail CFD trading accounts at the CFD provider that lost money. This calculation has to be done every three months and cover the 12-month period preceding the date on which it is performed.

An individual retail client CFD trading account is considered to have lost money, according to ESMA, if the sum of all realized and unrealized net profits on CFDs connected to this CFD trading account during the 12-month calculation period is negative, including any costs, charges, fees, commissions relating to the CFDs connected to the account.

The UK's regulator, the Financial Conduct Authority (FCA), set out similar rules for brokers it oversees.

The publication of such risk warnings is mandatory for brokers offering CFD trading. When trading stocks with a stock broker, for instance, you don't get the same warning, even though retail clients in general might not be a lot more successful when trading stocks. However, leverage makes this form of trading more risky.

Leverage allows you to trade CFDs with a smaller amount of money and increase the size of your trading position. It might multiply both your potential profits and losses, making it a double-edged sword, so be careful when using it.

If you are wondering how leverage works in CFD trading in detail, check out this article by one of our experts to find out more about the potential risks and rewards.

There are numerous ways you can mitigate the risk associated with leverage. Here are a few tips.

• Set realistic targets. Study the underlying asset, the market and also watch your behavior, if you can easily get carried away. Set a profit target based on your analysis.
• Use stop-loss orders: it closes your position if the price of the underlying asset moves against you by a certain amount. This way you can limit your potential losses.
• Diversify your portfolio: This is really basic, but don't put all your eggs in one basket.
• Set the leverage manually, if the broker allows it: leverage can amplify your potential gains, but it can also amplify your potential losses. Make sure you understand the risks associated with leverage. Regulators usually set a maximum leverage, and brokers usually set the leverage automatically. At some brokers, you can manually set (reduce) the leverage for yourself, which can also help limit your losses.

Unfortunately, XM does not allow you to set your leverage manually. Check out the other risk management tools to better manage your risks.

If you are looking for the brokers that offer the best CFD trading conditions, check our top recommendations of the best CFD brokers in the world.

Our expert team here at BrokerChooser specializes in helping you find a broker that best suits your needs. We have reviewed over 100 brokers based on BrokerChooser's unique methodology.

If you have any feedback or questions, feel free to contact us via email!