CFD trading tips - how to manage risks using broker tools

Written by
Fact checked by
Adam N.
Updated
Dec 2023

CFDs are risky assets: at most brokers, about 60-80% of retail traders lose money on CFD trading. Our analyst team at BrokerChooser, most of whom trade on a daily basis, know this risk all too well. But our personal and professional experience with CFDs also taught us that trading CFDs doesn't need to be a death trap.

In this article, we'll show you that with some preparation, discipline and a good grip on the use of brokerage tools, you can greatly increase your chances of successful trades, or at least protect yourself from the worst of losses.

Setting stop-loss orders to minimize your losses; using leverage prudently; picking the right trading position; employing automated trading - these are all useful tactics to make the most of your CFD trades. We'll discuss them all in the following chapters.

In addition to these handy tips, we'll also let you browse dozens of the world's top CFD brokers to see which ones offer the best tools for optimizing your CFD trading; all based on up-to-date broker data.

If you've already mastered these topics and all you need is a reliable broker to start trading, check out our list of the best CFD brokers in 2024. This ranking incorporates trading costs as well as the general quality of brokers' services and trading platforms. It is based on an in-depth review and live-testing of more than 100 brokers by our analyst team.

THE ESSENCE:

  • Educate yourself before you start trading CFDs; open a demo account first
  • Set up stop-loss orders to limit potential losses on a trade
  • Use leverage with caution if you want to avoid big losses
  • Understand when to open a long or short position
  • Into tech? Try algorithmic trading for more efficient trade decisions and execution

Basic tips before you start CFD trading

CFDs (Contracts for Difference) are complex assets that are not normally recommended for beginners. Still, everyone has to start somewhere. So before we discuss various CFD trading and risk management tools offered by brokers, here are some general tips that can help you build up a solid foundation.

  • Educate yourself about the basics. If you're starting from scratch, read our in-depth guide to CFDs; followed by an overview of the practical side of CFD trading.
  • Feel like you're ready to start trading? Not so fast. We suggest you first open a demo account at your broker, where you can carry out mock trades and get a feel for various brokerage tools without risking any actual money.
  • Before you start trading, make sure you have a strategy and stick to it. This should include specific ideas on how big a loss you can tolerate or how big a profit you'd be happy with in general or on a specific trade.
  • In the process, don't let your emotional biases shape your decisions. Fear or greed can easily cloud your judgment; to avoid this, learn about the role of strategy and emotional bias in CFD trading.
  • Do your research on the assets you trade, be it a stock, stock index, commodity or any other CFD. You can do your own independent fundamental or technical analysis, but many brokers also offer high-quality research reports.
  • Diversify - this is the number one rule for traders and investors on all markets. Don't invest all your cash into just a handful of CFDs. Instead, go one small trade at a time, so you don't lose an arm and a leg if one of your trades is wiped out. Also, spread your trades across several industries or even CFD asset types.
  • Be mindful of CFD trading costs. These can differ greatly from one broker to another and from one asset to another; so make sure you're aware of all the fees and other costs involved in your next trade.

For more information about all these, and for further general advice, explore our comprehensive list of CFD trading tips.

Order types at CFD brokers

In traditional long-term stock investing, it often makes little difference whether you buy or sell a stock today or tomorrow, for $100 or for $101. But in CFD trading, where even small price movements can have an outsize impact on your profits or losses, choosing the right order type is critical.

When placing a simple market order, you immediately buy or sell an asset at the current market price. However, many brokers also offer alternative order types that allow you to tinker with when, or at what price to buy or sell an asset. These can help you minimize losses or lock in profits by automatically closing your positions at pre-set levels.

Choosing the right order types can help you stick to your strategy even if your emotions would steer you elsewhere. They can also help take care of your trading positions when you're away from your broker platform and would otherwise miss out on a big price swing.

Stop-loss orders

A stop-loss order instructs your broker to automatically close a position when the price of the asset drops to a level you have specified, called the stop price. Its main purpose is to limit potential losses and therefore protect your capital.

Browse the articles below to learn more about stop-loss orders and their limitations, and to see if it's possible to set up stop-loss orders for CFDs at the broker of your choice.

Take-profit orders

You can also set automatic sell orders the other way - that is, instruct the broker to close your position when it reaches a certain profit level. But why would you want to do that? Well, prices don't rise forever, and setting up a take-profit order is a smart way to ensure that you don't pursue unrealistic gains.

Find out more about take-profit orders, and whether they're available at a broker you're considering using, by clicking on the articles below.

The importance of leverage in CFD trading

An important aspect of CFD trading is leverage; that is, the possibility to make a larger bet than you could otherwise afford with just the money you deposited. This can amplify your gains; for example, with 20:1 leverage on a stock CFD trade, you can reap the gain on 20 stocks while putting down the price of just one stock.

However, leverage can also blow your losses out of proportion. In the above example, if the price moves in the wrong direction, you would take the combined loss on 20 stocks, even though you only invested the price of one stock. This is what makes CFDs so risky: just a small change in the price of the underlying asset can easily wipe out your entire investment into that particular trade.

How high can leverage be?

Some brokers can offer leverage levels as high as 1000:1 for selected products, but regulators on major markets such as the EU often impose a maximum limit on leverage, in an effort to protect retail investors from outsize losses.

At most brokers, you'll typically see maximum leverage levels ranging from 2:1 to 30:1, depending on the asset type or the regulator they fall under. Click below to find out what leverage levels are allowed at some of the world's top CFD brokers.

Can you change leverage manually?

Some CFD traders are prepared to take on risks associated with maximum leverage, but others are more cautious and are content with lower leverage levels. If you belong to the latter group, you should seek out brokers that allow you to change leverage manually. For example, even if a broker allows you to trade a stock index CFD with 20:1 leverage, you may prefer to play it safe and go with 5:1 or 2:1 leverage only.

Unfortunately, many brokers only let you use the default maximum leverage level, which may be too high for your risk tolerance. Browse the list below to find out which brokers allow you to tone down leverage to levels that you are comfortable with.

Understanding long and short positions

When trading CFDs, there are two basic types of positions: long and short.

  • You should take a long position if you think the price of the underlying asset will rise
  • You should take a short position if you believe the price of the underlying asset will fall

Taking a long position is pretty straightforward - you buy an asset, and wait for its price to rise before selling it for a profit. Check the articles below for more details, plus trading conditions at each broker for a typical long position.

Short positions are a bit more tricky. When betting on the price of an asset to fall, you would borrow CFD units from your broker and sell them immediately on the market. You would then wait for the price to fall, so you can buy the units back at a lower price and return them to the broker, pocketing the price difference. Since most asset prices tend to rise over the long term, you really need to pick the right time to be able to profit from shorting an asset.

Click the articles below to learn more about short positions and to see which broker has fees and services that make it especially suitable for short selling.

Algorithmic trading

Special order types such as stop-loss can save you the hassle of constantly watching market movements, and can remove emotional bias from your trading decisions. But you can take this a step further by using algorithmic trading (also known as automated trading or simply algo trading).

Algorithmic trading involves writing a computer program consisting of mathematical instructions to automatically make trading decisions, based on a preset trading strategy and available market information. You can then hook up this program to broker trading platforms that support API (Application Programming Interface) access.

Algo trading enables high-speed trade execution, based on a split-second analysis of market conditions and trading opportunities. However, it is also vulnerable to technical problems and system failures, and is not an option for traders who aren't particularly tech savvy.

Explore the articles below for more details and to find out which brokers allow automated trading of CFDs.

CFD asset types

One of the main advantages of CFD trading is that there are many underlying asset types to choose from, from stocks and stock indices to commodities and forex. This allows you to diversify your CFD trading positions and possibly mitigate your overall risk exposure.

Stock CFDs

Stock CFDs are among the most popular assets with CFD traders. They tend to be relatively liquid; and CFD brokers often let you trade stock CFDs from many global stock exchanges, which isn't always the case when it comes to real stocks. But stock CFDs lack the benefits that 'real' stockholders enjoy, such as voting rights or dividends; and you must always keep in mind the high risk of trading with leverage.

Check below if the broker of your choice offers stock CFDs; and if so, how many and under what conditions.

Crypto CFDs

Cryptocurrencies are increasingly popular among traders, but crypto exchanges are still not well-regulated enough, and the tech side of crypto can be too complex for many. Enter crypto CFDs - a simpler and safer way to ride the crypto market. Just keep in mind the high risk of leveraged trading, and the fact that you won't hold the actual coins - so you can't use them for payment or trade them peer-to-peer.

Check below if these popular CFD brokers also offer crypto CFDs; and if so, how many coin CFDs are available and under what conditions.

Commodity CFDs

Commodity CFDs offer an easy entry to the world of commodity trading, as long as you're aware of the high risks of leveraged trading. For the average trader, commodity CFDs are less complex than commodity futures contracts; and are certainly more convenient than physical commodity trading, unless you own a grain silo or a fleet of oil tankers.

Check below if these top global CFD brokers have commodity CFDs in their selection; and if so, how many commodity types are available and what fee conditions you should expect.

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Author of this article

Tamás Gyuriczki

Trading Titan | Investment • Stock Market • Market Analysis

As a financial expert with BrokerChooser, I play an integral role in the analyst team by actively reviewing many of the 100+ brokers that are listed on our site. I personally open accounts with real money, execute trades, test customer services. My hope is that my first-hand experience with these brokers, incorporated in our reviews, helps users find the most suitable broker for their needs.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology.

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