Recently, I’ve noticed that many beginners around me want to trade CFDs, but their understanding of CFD risk is still quite one-sided. I’ll share some of my experience from the past few years in the hope of helping everyone avoid some pitfalls.

First, you need to talk about platform risk. This is the easiest to overlook—and also the most deadly. Many people are lured in by small interest gains or rebates, then rush into unlicensed platforms. These platforms usually don’t have genuine regulatory credentials. They allow you to transfer money directly to private accounts, and once your user base reaches a certain size, they just disappear. Because they’re essentially “three-no” companies, there’s nowhere to go to seek remedies. There’s another type too: platforms that look compliant at first, but funds end up being misappropriated due to operational problems or a “black swan” event. The Swiss franc incident in 2015 is a typical example. FXCM’s stock price in the U.S. crashed by 87%. Although U.S. clients were ultimately rescued, clients in other regions were not so lucky. So when choosing a platform, you must choose a regulated broker that has years of history and a reputation you can trust.

Then comes the risk of liquidation from leverage. This is the part of CFD risk that’s easiest to understand, but also the easiest to get wrong. Leverage is a double-edged sword: used correctly, it can amplify returns; used incorrectly, it leads to instant liquidation. For example, if you have $10,000 and open 100x leverage to trade gold, a $1 move in the gold price means a $1,000 profit or loss. Since gold typically fluctuates by about $20 per day, once you’re on the wrong side of the move, you’re wiped out immediately. My advice is that practical leverage of 3-5x is more reasonable. Also, you must set a stop-loss before opening any position. Experienced traders generally limit a single loss to no more than 10% of their principal, while beginners should keep it to 2-3%. Stop-loss sounds simple, but when it comes time to execute, many people still can’t do it—yet that’s the basic skill of managing CFD risk.

Slippage and price gaps are also unavoidable. When major economic data is released, spreads can suddenly widen, and the price you expected may be very different from the actual executed price. The Brexit event is the most typical example: all instruments related to the British pound saw huge slippage, and many people’s stop-loss levels were swept unexpectedly. Weekend gaps are the same—on Monday, the opening price may be completely different from the previous Friday. These two risks are not fully controllable. So rather than trying to completely avoid them, it’s better to focus on capital management and risk management.

Another easily overlooked factor is overnight interest rate changes. If you want to earn interest through arbitrage, you need to pay attention to how the platform adjusts overnight fees. Platforms will fine-tune interest based on users’ net long and short positions, and sometimes they even change it dramatically. If you still haven’t recovered the spread and commission costs through interest, you could end up in a tough spot. My suggestion is not to put all your eggs in one basket—combine 2-3 currency pairs to smooth out risk.

After talking about so many CFD risks, the key is still to choose the right platform and build your own trading system. That way, you can put your energy into trading itself, rather than worrying every day about the platform running away or getting hit by slippage. CFD trading itself isn’t the problem—the real issues are risk management and platform selection.