Risk Disclosure: Leveraged Forex and CFD Trading
A plain explanation of the risks that come with leveraged forex and CFD trading, written for readers of this independent editorial site.
Platforms of the sponsorThe Limits of Past Performance
Suppose a trader opens a position on a currency pair with a small deposit and a large borrowed exposure, and the market moves in their favour for a week. The account balance grows quickly, and the strategy looks sound. Suppose a second trader does the same thing and the market moves against them: the loss arrives just as quickly, and sometimes takes the whole deposit with it. Neither outcome tells you much about what the next week holds. A run of good results can reflect luck, a favourable market condition that has since passed, or risk that was taken on without being visible in the balance.
Past results say little about the future because markets change and because the sample most people see is short. A strategy that worked over one quarter may have been tested against nothing but calm conditions. Brokers and reviewers are required to warn about this for good reason: figures from earlier periods describe what already happened, not what will happen next. Anyone who treats a strong historical record as evidence of future profit is reading the wrong signal.
This site reviews a broker for South African readers but is not that broker, is not affiliated with it, and does not provide financial services, accounts, deposits or advice. Nothing published here should be read as a recommendation to trade or as a forecast of any outcome.
Leverage in Both Directions
Leverage lets a trader control a position larger than the money set aside for it. If a trader puts up a small margin and controls a position many times that size, a one percent move in the underlying market produces a gain or loss equal to a much larger share of the margin. That is the whole mechanism, and it is symmetrical. The same multiplier that turns a modest price change into a large percentage gain on the deposit turns an equally modest adverse change into a large percentage loss.
Small movements become significant. A currency can move one or two percent in a day without anything unusual happening, and at high leverage that move can wipe out a substantial part of the account. Traders often focus on the size of the position and forget that the deposit, not the position, is what they can lose. Leverage does not improve the odds of being right; it only changes how much a given move costs or pays.
The risk is not confined to the direction of the trade. Volatility can spike during news releases, political events or thin trading hours, and prices can jump past the level a trader intended to exit at. Slippage means the realised loss can be larger than the plan assumed.
The Share of Losing Accounts
Regulators in several markets require brokers to publish the proportion of retail client accounts that lose money when trading contracts for difference. Those disclosures commonly show a majority of retail accounts losing, often well above half. The figure varies by broker, by period and by the products offered, so the specific number should be read from the broker's own current disclosure rather than assumed.
The number matters because it describes the population, not an exception. It means that losing is the ordinary outcome for retail traders in these products, not a rare accident that happens to careless people. Anyone considering trading should treat that statistic as the base case and ask what they know or can do that would put them in the minority.
The disclosure is also a reminder that cost and behaviour, not only market direction, drive the result. Frequent trading, holding positions longer than planned, and increasing size after a loss all tend to move an account toward the losing group.
Running Costs and Forced Closure
Trading costs accumulate whether or not a position moves in the trader's favour. The spread, meaning the difference between the buying and selling price, is paid on entry and effectively on exit. On actively traded pairs it may be small in percentage terms, but it is charged on every round trip and grows with the number of trades. Some accounts also carry commission, and the schedule should be read before trading rather than after.
Positions held past the daily cut-off usually attract overnight financing, calculated on the size of the position and the applicable rate. For a leveraged position held for days or weeks, this charge can quietly exceed the spread. Other running costs may include currency conversion when the account currency differs from the instrument's, and fees for inactivity or for certain order types. None of these depend on the market going your way.
Margin requirements add a second layer. If losses reduce the account's equity below the required margin, the broker may issue a margin call requiring additional funds. If the equity falls further, the broker can close positions automatically, without waiting for instruction. Automatic closure can lock in a loss at the worst moment, and in fast markets it may occur at a price worse than the trader expected. Traders should understand the broker's margin and close-out rules before opening a position.
Questions about this disclosure can be raised through the contact form on this site. It is an editorial resource only and cannot open accounts, accept deposits or give advice.
