Managing CFD Liquidation Risk with Stops and Position Sizing
Summary
The article explains how forced liquidation differs from a planned stop loss: liquidation occurs when losses erode equity until the platform’s margin threshold is reached, while a stop lets the trader choose an exit in advance. It stresses that margin is collateral rather than a cap on losses, since exposure depends on notional position size, price movement, costs, execution, and correlated holdings.
Its practical framework is to define thesis invalidation and an acceptable loss before entry, then size the position using stop distance and account risk limits. It warns against risking too much per trade, moving stops after losses, and adding to losing positions without a preplanned scale-in strategy. The article also notes volatility, gaps, slippage, overnight costs, and correlated positions as risks that can undermine stops. Examples illustrate compounding drawdowns, but no empirical testing is offered, and actual CFD rules and outcomes vary by platform and market conditions.
Key ideas
- Margin requirements do not cap losses because profit and loss reflect the position’s notional exposure.
- Set a stop at the point where the trade thesis is invalidated and size the position around the planned loss.
- Large losses require disproportionately large gains to recover, so risk per trade affects account resilience.
- Averaging down increases exposure unless it follows predefined entry, size, and exit rules.
- Volatility, gaps, slippage, costs, and correlated positions can accelerate losses or affect stop execution.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.