Risk Disclosure for Leveraged Forex and CFD Trading
An independent editorial note on the risks that come with margin trading, written for readers of this review site in Australia.
Rates at the sponsorUnderstand what a small move can do to your account
Suppose you put up one thousand dollars of your own money and use leverage of thirty to one to control a position worth thirty thousand dollars. A one per cent move against you wipes out three hundred dollars, which is nearly a third of what you actually deposited. A three per cent move in the wrong direction takes almost everything. That is not a rare event in currency pairs that can swing several per cent in a day around central bank decisions or inflation data.
This is the basic arithmetic of margin trading. Leverage does not change the size of the market move. It changes the size of that move relative to the money you put at risk. The same mechanism applies to contracts for difference on indices, shares, commodities and crypto assets, where the contract tracks an underlying price without any ownership of it.
Brokers are generally required to disclose the share of retail client accounts that lose money when trading these products. In most jurisdictions where this disclosure is published, the figure sits between roughly seventy and eighty per cent of retail accounts losing money over a stated period. The exact number varies by broker, by entity and by the period measured. It is worth reading rather than skimming, because it describes the ordinary retail experience, not an unlucky minority. This site is an independent editorial resource. It is not the broker, it has no affiliation with the broker, and it does not open accounts, accept deposits or give personal advice. Everything below is general risk information, not a recommendation.
Know which entity holds your money and what protects it
A broker group may operate through several legal entities in different countries, and the entity that accepts Australian clients may not be the same one that serves clients in Europe or the United Kingdom. This matters more than most readers expect. Client money protection, dispute resolution arrangements and leverage caps all follow the licence of the specific entity you sign with, not the brand on the website.
Some jurisdictions run compensation schemes that can return a capped amount if a firm fails, and some require client funds to be held in segregated accounts. Others offer neither, or offer weaker versions. Rules on negative balance protection also differ. Negative balance protection means you cannot end up owing the broker more than your account balance after a sudden gap. Without it, a violent move can leave a debit balance that you are expected to settle.
Before depositing anything, identify the exact entity named in the client agreement, check which regulator supervises it, and confirm what that regime does and does not cover. Where protection is limited, the practical consequence is that a broker failure or a disorderly market can cost you more than the balance shown on your screen. This site does not provide advice on which entity is suitable for you.
Expect gaps, slippage and violent moves around news
Prices do not always trade continuously. Currencies gap over weekends, around elections, after surprise rate decisions and during geopolitical shocks. A stop loss is an instruction to close at the next available price once your level is reached, not a guarantee of that price. In a gap the next available price may be far from where you set the order, and the loss can exceed what you calculated.
Slippage can also work against you in fast markets even when there is no gap, because liquidity thins and quoted spreads widen. Moments when the market moves most are often the moments when execution is worst. Orders may be rejected, filled in parts or filled at a materially different level.
Contracts for difference on single shares carry additional event risk, including earnings releases and trading halts, where the underlying may stop trading while the contract continues to be marked. Anyone using tight stops as a substitute for position sizing should understand that stops reduce risk in normal conditions and can fail to do so in disorderly ones.
Add up what trading costs you every day
Every position carries running costs. The spread is the difference between the price at which you buy and the price at which you sell, and it is charged on entry and exit whether the trade wins or loses. Commissions may apply on top for some instruments. Overnight financing is charged or credited daily on leveraged positions, calculated on the full notional value, so a large position held for weeks can accumulate charges that dwarf the original spread.
There are other costs that are easy to overlook: currency conversion when your account is denominated in one currency and the instrument in another, wider spreads outside core market hours, and fees on deposits or withdrawals. Frequent trading multiplies all of these. A strategy that looks profitable before costs can be a losing one after them.
The honest way to assess costs is to multiply the per-trade charge by realistic trade frequency and holding periods, then compare that total with the movement you expect to capture. If the edge is small, costs will consume it.
Treat leverage as an amplifier and past results as history
Leverage multiplies gains and losses in exactly the same proportion. It does not improve the odds of being right, and it shortens the time an account can survive a losing streak. A trader who is correct slightly more often than not can still lose money once leverage, position size and costs interact with a run of adverse moves. The higher the leverage, the smaller the error or the unlucky sequence needed to produce a large loss.
Past performance tells you what happened to someone else, in a particular market, with particular costs and particular luck. It says little about what will happen next. A track record, whether from a broker, a signal provider or your own account, is not evidence of a repeatable edge, and it certainly does not promise profit. Markets change regime, volatility clusters, and strategies that worked in one period often fail in the next.
Leveraged forex and CFD trading is not suitable for everyone. Money committed to it should be money you can afford to lose entirely without affecting your standard of living or your obligations. If you are unsure whether these products fit your circumstances, seek independent licensed advice. For corrections or questions about this page, use the contact form on this site.
