The special risks in CFD trading

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In extreme cases, the loss can exceed the stake many times over - even if every position is hedged with a stop loss. Whether these risks can be avoided entirely also depends on the broker.

The risk of high margin calls can be illustrated with an example. An investor opens a long position in a exness thailand CFD with a market value of 10,000 € at an index level of 8000 points on Wednesday. This is the only position in the account. The broker requires an initial margin of 2.0%, which corresponds to €200.

After this amount has been blocked for the opening of the position on the trading account, no further free capital is available. The trader sets a stop loss at 7920 points. The broker's maintenance margin is 0.50%, so that if the price falls below 7880 points, the closeout level is reached and the position is automatically closed out.

Price gaps trick the safety systems

The DAX closes on Friday evening at 8000 points and thus unchanged. The trader decides to hold the position over the weekend.

During the weekend, a political event occurs; a conflict that has been going on for some time escalates unforeseen and unexpected by the majority of market participants. Economists fear a noticeable slump in economic growth and declining profits at many companies for several quarters.

The DAX therefore opens at 7200 points on Monday morning: This is the first price established in the new trading week. The stop loss is triggered immediately after the first price is established. A stop loss is an unlimited sell order conditional on reaching the set price mark. Once activated, it is executed at the next possible price - in this case 7200 points.

The broker's hedging systems were also unable to take effect over the weekend, as it was not possible to close out the trade. The price loss of 800 points corresponds to a monetary loss of 10 % of the position value or € 1000. After deducting the deposited margin of 200 €, a loss of 800 € remains on the trading account.

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The broker now requests the customer to balance the account immediately.

Guaranteed stop loss orders and exclusion of negative account balances Anyone trading CFDs must always take this risk into account. Some brokers offer their clients protection against negative account balances.

Basically, two possibilities have become established on the market:

  •     The broker can exclude negative account balances in a legally binding way. The terms and conditions then stipulate that any negative account balance will be settled by the broker.
  •     Brokers can offer their clients the option of guaranteed stop loss orders.

If price gaps then occur, as in the example above, the order is nevertheless closed out at the specified stop loss level. The broker pays for possible losses in this context - for this he receives an additional fee or insurance premium when placing the stop loss order.

Market Maker: Where do conflicts of interest arise?

To avoid misunderstandings: The business model of market makers is completely unproblematic and in no way reprehensible.

The initial profits are merely made in a different way than is the case with DMA brokers, who charge commissions for order execution. There will not always be exactly as many long positions as short positions - as assumed in the example above.

The market maker is then confronted with net positions in one direction or the other - and thus bears a market price change risk. If this is neutralised by appropriate operations on the financial market, this minimises potential conflicts of interest.

For investors, however, it is hardly comprehensible from the outside whether the broker neutralises net positions or bears the risk himself.











































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