How to Identify and Avoid CFD Manipulation Techniques


You may be familiar with CFDs if you are interested in online trading. But did you know that online trading markets can also be manipulated like other markets? Authorities like the government do not centrally control or regulate online trading; hence, it can be manipulated, leading to significant losses for traders or investors. But if you are not aware of CFD manipulation or CFDs in general, this article has everything you need to know.

What Are CFDs?

It is a contract between a CFD broker and a trader; the latter has to pay the difference in an asset’s buying and selling price. Neither party in the agreement owns the asset but earns profits based on their speculation regarding the asset’s price. The CFD trading process comprises two trades: opening and closing trade. If the trader buys an asset in the opening trade, it is called a long position, and the closing trade is a sell. Whereas, if the trader sells first, it is called a short position, and the second trade is a buy.  

Before we understand the manipulation of CFD trading, let’s look at some benefits and drawbacks of this trading.

Advantages of CFDs

  1. Wide variety of assets
  2. Provides higher leverage than traditional trading
  3. No limitations on day trade – buying and selling the same asset within one day
  4. No restriction on shorting – selling an asset and repurchasing it at a lower price 

Disadvantages of CFDs

  1. Weak industry regulation – some brokers are not verified and could be scammers
  2. Traders pay the spread – the difference in the buying and selling prices of the asset
  3. Risks such as market volatility – prices change rapidly

What is Market Manipulation with Regards to CFD’s According to The Chargeback Way Experts?

It is an attempt to control the market price of an asset such that it artificially increases or decreases. The market will move towards the outcome or, in this case, the asset price they want, giving high returns. However, if the trader is made aware of the forms of manipulation and its effect on investment, it may be possible for them to avoid it. 

5 Major Market Manipulation Strategies

1. Bear Raid

Traders known as short-sellers maintain a short position; however, they aim to repurchase the same asset at a lower price by spreading false information. This price lowering is known as Bear Raid, and the trader is called Bear Raider. Other traders also sell, causing the price to drop; hence the bear raider gains a profit. This strategy primarily affects long-term investors because this process can last for weeks or months.

2. Wash Trading

This strategy makes the market appear more active, encouraging traders to invest. The same asset is bought and sold without any loss or gain to increase the stock volume, attracting traders into the market. This process affects short-term investors more than long-term investors because buying and selling are done rapidly.

3. Pump and Dump

False information regarding the price of assets is provided to traders. The price is pumped more than its actual value, portraying it as highly profitable and encouraging traders to invest in it. As the demand for the asset increases, its price rises, and the asset owners dump or sell it, earning huge profits. 

4. Churning

Brokers or your trading account managers employ this strategy. They increase the general number of trades from your account, increasing the commission they make. If commission costs increase, but returns do not, it is a sign of churning. Mostly, long-term investors are affected by this form of market manipulation. 

5. Cornering Market

This strategy refers to an individual or group having a monopoly in the market such that they can manipulate asset prices; hence the market is cornered. They have complete control over buying or selling and profits or losses from that asset. Thus, long-term investors are primarily affected.

5 Ways to Avoid Market Manipulation

  1. Using stop-losses while maintaining long positions can reduce the financial loss due to Bear Raids.
  2. Refrain from trading when stock volume increases rapidly – indicating wash trading – without changing prices.
  3. Don’t get lured into trade offers that seem too good to be true as it may be pump and dump. Always have an exit plan for trades to prevent or limit losses.
  4. If profits are constant or decreasing while brokers or managers receive more commission, it may be churning. You can report the broker or manager to relevant authorities.
    1. Financial regulators overlook online trading, and you can report the broker to them. They have lists for verified brokers, so consulting those lists is beneficial.
    2. Third-party companies like ChargebackWay also provide a platform for reporting brokers and managers involved in illegal activity like churning. Although Chargeback Way mainly recovers funds lost to different online scams, it can help you verify brokers and take legal action against them if you have been scammed.  

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