Risk Disclosure: Leveraged Forex and CFD Trading
This page explains the main risks that come with trading forex and contracts for difference, so you can judge whether such products suit you.
Costs at our partnerUnderstand What This Document Covers
This page sets out the risks that come with leveraged trading in forex and contracts for difference (CFDs). It applies to readers of this site in Australia. Read it as general information, not as advice, and not as a recommendation to trade with any particular provider.
This site is an independent editorial resource that publishes reviews and articles about a broker. It is not the broker, it has no affiliation with the broker, and it does not offer financial services, open accounts, accept deposits, or give personal or general financial advice. Nothing here should be read as an endorsement of any product or firm.
We describe risks in general terms only. The actual terms of any trading relationship, including fees, margin rules and legal protections, depend on the broker's own documents and on the entity you deal with. Always read those documents before you act.
See How Leverage Expands Gains and Losses
Leverage lets you control a position much larger than the money you put up. That magnifies the effect of every price movement, in both directions. A small favourable move can produce a large gain relative to your deposit; a small adverse move can produce an equally large loss. Losses can exceed your initial deposit.
Because positions are large relative to your funds, a short stretch of unfavourable prices can wipe out a substantial part of your account. Traders often underestimate how quickly this can happen in fast markets.
Account for Spreads and Ongoing Costs
Every trade carries costs. The spread, meaning the difference between the buying and selling price, is charged on entry and exit. Overnight financing is applied to positions held past the daily cut-off, and it can add up over days and weeks. Some brokers also charge commissions or account fees.
These costs apply whether or not the trade is profitable. They reduce your return on winning trades and add to the loss on losing ones. Frequent trading, or holding positions for long periods, makes them more significant. Check the broker's fee schedule before you trade.
Accept That Past Results Say Little About the Future
Markets change. A strategy that worked last year, or a review that showed strong results, tells you very little about what will happen next. Historical performance, whether of a trader, a system or a product, is not a guide to future outcomes.
Be sceptical of any material that presents profits without the corresponding risks. Trading outcomes depend on conditions that cannot be predicted, and many traders lose money over time.
Know How Margin Calls and Automatic Closure Work
If your account equity falls below the required margin, the broker may issue a margin call and ask you to add funds. If the equity continues to fall, the broker can close your positions automatically, without further notice, to limit its own exposure. Closure may happen at prices you would not have chosen, and it can lock in losses.
Protection also differs by jurisdiction and by entity. Client money protections, dispute resolution arrangements and compensation schemes vary from one country and one legal entity to another, and an overseas entity may offer weaker safeguards than an Australian one. Trading only with money you can afford to lose remains the most reliable safeguard you have.
