Are you just getting started in CFD trading? You can move on to the more complicated part if you’re familiar with the terms and fundamental definitions. You may have encountered the terms such as leverage, margin, margin call, and overnight charges. However, you should be more familiar with them.
Contract for Difference (CFD) trading has been popular in the world of financial markets. Although it’s the go-to of many traders due to the potential for high returns and flexibility, it also comes with risks.
Fortunately, you can use risk management tools to prevent losing money. As you know, when you opt for CFD trading, there’s the margin call that you should mind to avoid losing your hard work. And to prevent losing your account and the things you’ve worked hard for, you can use the stop-loss order.
But before you get there, you should familiarise yourself with the process of CFD trading. Once you know the basics, you can gradually shift into improving your trading strategies and using risk management tools.
In this article, we’ll discuss margin calls and the benefits of using the stop-loss order to prevent it. So, if you’re interested in this trading hack, don’t hesitate to leave a comment below!
What is a Margin Call?
In CFD trading, you’re given a margin used as collateral to continue trading with leverage. As you know, you don’t need to pay the same amount to start trading when you trade via CFD. Instead, you can partially own the underlying asset by depositing a margin or a percentage of the total trade value in your trading account.
In addition, the trader can also place more significant positions, enabling them to craft a better portfolio.
What Causes a Margin Call?
Since you must maintain a margin or balance in your trading account, it should stay that way. The broker issues a margin call when the amount in your account falls below the required margin. When that happens, you should deposit an ample amount during a specific time frame to continue trading. Otherwise, your current trader’s position will be closed.
Meanwhile, if you secure the amount before the time limit ends, you can continue where you left off. Of course, brokers are just doing their business, and the margin call is a great way to protect both the broker and the trader from losing more money.
How to Avoid a Margin Call?
Are you worried about receiving a margin call? You should monitor your account and maintain the margin level to avoid this. But before you get to this, you should understand how CFD trading works and the leverage ratio. In addition, you should know how the market works.
Another way to avoid margin calls is to build a comprehensive trading strategy. When you win most of the time, it’s not likely that you’ll reach your margin limit.
When the trader reaches the margin limit and receives a margin call, they can sell or liquidate some of their assets to save their accounts. If not, they won’t be able to use their accounts anymore.
Using Stop-loss Order to Avoid Margin Calls
As mentioned, one of the most popular ways to avoid margin calls is using stop-loss orders. When you place a stop loss order, you can indicate the amount where your account will stop trading to protect your capital.
You can use the stop-loss order whenever you need to. However, it’s more helpful when trading in a volatile market. Aside from helping you minimise your losses, it also helps build a great portfolio.
However, it’s essential to know that placing a stop-loss order isn’t foolproof. You may still encounter problems, such as slippage and market gaps. When the market is volatile, your stop-loss order may not click easily, so you should adjust your order carefully.
Combining Margin Calls and Stop Loss Orders
The margin call and stop loss order prevent excessive losses in CFD trading. Each has advantages, and combining them can make a powerful risk management tactic. But although these options are helpful, you should still have a thorough trading plan before trying them.
Once you have a trading plan, you can try it using a demo trading account to see if it works. Although CFD trading doesn’t require much capital, trading without prior experience can mess up your trading portfolio and strategies.
Final thoughts
Whether you’re a beginner or a professional trader, using stop loss to avoid margin calls is essential and an effective risk management tactic. In addition, traders should also be aware of the mechanism of CFD trading and its basics to get started with leverage and risk management tools, like stop-loss orders and limit orders.
We hope this article helps you get started with CFD trading and risk management. If you want to add more or share your thoughts about this, don’t hesitate to leave a comment below!
ABOUT THE AUTHOR
Aliana Baraquio has over 5 years of experience as a writer and market analyst. She specializes in developing beginner-friendly trading techniques and tutorials. Additionally, she suggests FP Markets as the top broker for trading CFDs and Forex.