This risk management guide’s purpose is to alert and explain the main risks trading online may pose to new traders over the course of their trading career. Even if you have experience in trading leveraged products, we strongly suggest that you carefully read this guide. The goal of this guide is to ensure traders are supplied with a sound foundation of trading information in order to understand the importance of building a robust Risk Management Plan as a fundamental prerequisite of a successful trading career. This applies to all traders, both new and experienced.

• By having a solid understanding of the risks involved in trading and being aware of the trading tools available, traders can enhance their ability to minimise exposure to risks. Risk management is essential to the success of any trader. Success may be defined as the point where trades return more profits than losses. As such, it is crucial that as a trader you realise that potential losses are as integral and important a part of trading as potential profits. A correct approach to risk management attributes equal importance to both of these fundamental aspects.
• Developing a personal trading strategy is crucial to every trader’s success. It is of particular importance for you to develop a unique trading and risk management strategy of your own, as any decisions and actions you take regarding trading are your sole and absolute responsibility. As a consequence, you will also be fully responsible for the results of your trading decisions and actions, whether they be profits or losses. As such, you should not underestimate the importance of having a solid understanding of the principles, risks, and tools presented in this guide.
• The following section will present the fundamental principles of CFD trading. Comprehensive knowledge of these principles is necessary to understand the risk factors you may be exposed to while trading. A more in-depth analysis of these specific risk factors will be presented in the second section of this guide. Finally, the third section will focus on the tools available for managing the risks.

1. I. The Basic Principles of CFD Trading A solid grasp of the fundamental principles of CFD trading is crucial for managing your risk. The next section of this guide will present you with a variety of different forms of risk that should serve as the basis for every trader’s risk management plan.
   

   Contracts For Difference

   
   

   A contract for difference (CFD) is a derivative financial instrument with an underlying asset, meaning you do not physically own the underlying asset. A CFD is an agreement between the buyer and seller to exchange the difference in the current value of the underlying asset, such as a share, currency, commodity, or index and its value at the end of the contract.

   
   

   As derivatives, the price levels of CFDs are directly related to those of their underlying assets, and are thus affected by market volatility in the underlying instrument market. Please refer to the below section on Market Volatility for more information. Leverage and Margin

   
   

   CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position. You are able to leverage your investment by opening positions of a larger size than the funds you have in your account. This is called “trading on margin” (or margin requirement).4 With leverage you are investing a fraction of the trade’s value, but your position will return profits and losses as if you had invested the full value of the CFD position. It is crucial that you understand that leverage will inflate both your profits and losses. For an example of how leverage affects profits and losses, please see the section below on Losses. Leverage is expressed as a ratio of X:1 where X is the leverage. Most currencies have a leverage of 400:1, so we can say that the leverage is 400. Stocks usually have a lower leverage of 20:1 so the leverage is 20.

   
   

   The margin requirement is directly related to leverage. It is the expression in percentage of the leverage ratio. A leverage of 20 means a margin requirement of 5% (20:1 = 1/20 = (1/20 × 100) % = 100/20 % = 5 %)