Need to manage your CFD trading risks? Here’s a comprehensive solution from CityIndex that could help you

A CFD, or Contract for Difference, is an agreement between an investor and a CFD broker to exchange the difference in the value of an asset between the opening and closing of a position. Essentially, it means investors are able to profit from price movements of an asset without ever owning the underlying asset.

CFDs are available on a wide range of assets, including indices, shares, currencies, and commodities. It also offers leverage so investors can utilise a smaller portion of their trading capital to execute a larger trade, which suits certain trading strategies, including hedging.

CFD trading comes with a certain level of risk, along with all other forms of leveraged trading. To the uninitiated, it may even seem excessively risky, but that could not be farther from the truth.

Benefits of CFD trading

CFD trading offers a good number of benefits that are not available for other types of trading.

For instance, CFD trading is available on underlying assets like indices, which cannot be traded directly. At the same time, due to the nature of CFD trading, investors are able to place long and short trades to participate in both bull and bear markets.

More importantly, there are several effective risk management tools available at investors’ disposal, to enable them to manage their losses, while trying to maximise their profits.

Risk management at the heart of CFD provider City Index

Gone are the days where CFD brokerages are seen to be profiting from investors’ losses. On the contrary, it is in a brokerage’s best interest to ensure their investors are making money when trading with them, because successful traders will continue to trade in the long run, while a loss-making trader would cut their losses and stop trading quickly.

It was under this backdrop that City Index launched its Guaranteed Stop Loss Orders (or GSLO), a risk management tool that effectively protects investors in extremely volatile markets.

GSLO – an insurance you only pay for when you need it

A GSLO is an order that investors can place for free on any open trade, which stipulates the price at which their trade will close automatically, assuming the market moves contrary to their expectation.

Regular stop loss orders work in a similar fashion, except that the price at which the trade closes may not land at the investor’s set price due to slippage or gapping, a phenomenon that occurs in very volatile markets.

GSLO provides assurance that the trade closes at the exact price investors have chosen, in exchange for a small premium that investors have to pay when the GSLO is triggered.

That is like having an insurance protection plan but only paying for it when you use it.

City Index allows you to add GSLO to your trades in more than 4,000 global markets. Its premiums are calculated differently between different markets, but they are dependent of the size of the trade you want to protect, with a minimum distance required between the existing price of the asset and the set GSLO level.

Here’s a look at some examples of popular markets and their GSLO premiums.

Here’s how it works.

GSLO as a limited risk product

As an example, you purchased 2 Wall Street Index CFDs at 20420, and decided that 20300 is your maximum acceptable loss level. This is where you place the GSLO.

Your loss allowance is calculated as such:

 (20420 – 20300) x 2 = US$240

The GSLO premium for Wall Street (based on the table above) is 2 x the quantity of CFDs or stake charged in the base currency of your account. In this case the premium (which is only payable when triggered) is calculated as 2 x 2 = US$4 converted to base currency of the account.

Your maximum risk if the GSLO is triggered will be calculated as follows:

(20420 – 20300) x 2 + GSLO premium = USD$44

Shortly after the trade is placed, the price of the Wall Street Index suddenly drops from 20420 to 20259 as seen in the chart below.

Source: CityIndex

With the GSLO, your trade was closed at your chosen level and your loss was capped at US$244.

If you had placed a regular stop loss, the trade would have been closed at the next available price 20260 and resulted in a greater loss as reflected below.

(20420 – 20259) x2 = US$322

GSLO as a means to maximise trading, even for experienced investors

It is clear to see how GSLO can benefit an investor who might be new to trading CFDs, but why would an experienced CFD investor want to take the extra step of placing a GSLO instead of a regular stop loss order, or put a stop loss order at all?

Besides the assurance that your trade will close when you need it to, a trade with a GSLO will limit the risk on your trade to your initial deposit, which translates to a lower margin requirement. This means you will be able to place more trades with the same pool of trading capital.

If you are interested to learn more about CityIndex’s GSLO risk management tool, or would like to open an account to apply them in your next CFD trade, you will find all the information you need here.