
Unlike traditional trading, CFD trading is to bet on the future price of an asset. That by itself may sound a little frightening to the new investor and it should, because this type of trading carries a particular risk in the long-term due to volatility.
By the end of this guide, you will know everything about how to trade CFDs and where to start, most importantly, get to understand the essential tips as a starting trader.
CFD Trading – What is it?
CFD–Contract for Difference ensures one makes the possible money from fluctuating changes in the price of an asset. All of that happens while the trader does not own the asset.
The difference between the opened and closed prices is then predicted by this form of trading concerning the value of an asset or commodity. Moreover, it is one of the most famous commodities one can trade in; it requires a lot of time but can be very rewarding; still, it carries certain perils new investors should beware of.
Key Points About CFDs:
- CFDs can be applied to a range of assets, including stocks, commodities, currencies, and indices.
- A trader generates a profit or loss depending on the underlying asset’s price difference.
- CFDs can be held for a short or long period. However, holding costs usually make them most suitable for shorter-term deals.
How CFD Trading Works
Let’s review more information about the act of buying and selling CFDs:
Predict the Price’s Direction:
This is how CFD trading works in simple terms:
- If you think the asset price will go up, you “go long” and buy the CFD.
- If you predict the price to drop, you “go short” and sell the CFD.
Gearing:
CFDs are a margin trade, and you will only be required to deposit the fraction, or margin, of the trade’s value to open the CFD position. Gearing amplifies your exposure. Hence, your profits will be amplified and potential losses will be amplified.
Profits and Losses
The profit or loss will be the difference in prices of your CFD between opening and closing.
Example:
You opened a CFD for a stock at US$ 50 and sold it at US$ 60. You gained a profit of US$ 10- fees and other costs per unit.
Short and Long Opportunities:
You can speculate on both rising and falling markets.
Diverse Markets:
Trade on several thousand global markets, forex, commodities, indices, and shares, all from one platform.
Lower Capital Requirement:
Position opening may require only marginal investment, as low as 1% of the trade-in’s value.
No Ownership of Assets:
Avoid the hassles of owning physical assets while still profiting from the price movements.
CFD Risks and Considerations
While there are some advantages in CFD trading, there are risks too.
The following are the most critical things to consider:
High Volatility: The prices can move wildly, and this may result in quick gains or losses.
Lack of Regulation: The CFDs are not always regulated, which exposes traders to fraud. Choose a reputable broker.
Holding Costs: There are holding costs attached to the long-term positions that might nibble through your profit after some time.
Leverage Risks: The leverage amplifies your gains, but this is also the case with potential losses that could be larger than your original deposit.
How to Start CFD Trading
Here are the several summarized steps to start your CFD trading journey today!
Step #1 Choose a Good Broker:
You need a platform that has a good reputation, some form of regulatory oversight, and lastly, is user-friendly.
Step #2 Create an Account:
Create an account following the on-screen registration process, and deposit money into your trading account.
Step #3 Choose Your Market:
Choose an asset class that best suits your aims, objectives, and attitude towards risk.
Step #4 Place Your Trade:
Buy or sell according to your analysis. Follow up on your trade while adjusting your strategy to changes in market conditions.
Strategy for Successful CFD Trading
Once you know how to start trading CFDs, let’s have a look at some of the most successful strategies for gaining profits!
Tip #1 Risk Management:
- Allow the stop-loss order to reduce your losses.
- Only risk a small portion of your trading capital on one trade.
Tip #2 Stay Informed:
Stay updated about news in economics and financial events that might affect market fluctuation.
Tip #3 Technical Analysis:
Use charting tools and technical indicators to find trends and entry points.
Tip #4 Diversification:
Distribute your investments over different types of assets in order to reduce risk.
Tip #5 Demo Account:
It is good to first train on a demo account before using real money to test your strategy.
- Leverage Restrictions: The maximum amount of leverage is restricted to reduce risks.
- Full Disclosure: The terms and conditions must be clearly explained by the broker.
- Negative Balance Protection: A CFD trader can’t lose more than the amount deposited.
Before investing in any kind of CFD trading, you need to be legally and regulation-wise aware of the same in your country.
Examples of CFD Trading
Let’s look at some practical examples of CFD trading:
- (Step #1) You think that the price of gold will increase.
- (Step #2) You buy CFD on gold at the value of $1,800 per ounce.
Now, if the price of gold moves to US$1,900, you will be making a profit of US$100 per ounce, minus commissions. If the price of gold falls to US$1,700, then you would incur a loss of US$100 per ounce.
The example shows that in CFD trading, one can either make a profit or lose money.
More Tips for a New Trader
The beauty of CFD trading lies in its power for anyone who wants to diversify their portfolio and make a profit on the movements in the markets. However, a great understanding of its mechanics and ability to efficiently handle risks and research are indeed required.
For example, a new trader might have use of the following tips:
Start Small: To cut down your risks, it is very necessary that you initiate trading with small positions until you are well-versed in all aspects of CFD trading.
Understand the fees: Plenty of traders end up losing money simply because they failed to calculate the cost of a trade. There are various forms of spreads, commissions, or holding fees at night.
Conclusion:
CFD trading is fascinating and beneficial, offering huge returns by participating in financial markets without the ownership of underlying assets. However, it comes with inherent risks, which demand careful management, research, and discipline.
Start making the most out of your earnings today and turn yourself into a professional by staying abreast of information, practicing with demo accounts, and trading responsibly.
Happy trading!