What is CFD Trading?
A Contract for Difference (CFD) trading involves the buying and selling of a derivative product that helps you speculate on the price of original assets on financial markets. It’s a different trading method from the popular ones such as Day, Scalping, or Swing trading. With CFD, you do not own a real underlying financial asset and it is sometimes seen as an alternative way to invest.
CFD traders purchase a contract while predicting whether an asset will increase or decrease in value. The traders agree to exchange the difference in the price of an asset during the period of the contract. Depending on how correct your prediction is, you could make some profit or run at a loss.
Pros and Cons
There are many benefits of trading CFD, some of which include higher leverage compared to conventional stocks trading, increased liquidity, short and long-term training, access to the international market, hedging your share portfolio, and you also have a wide range of options to choose from.
On the other hand, there could be a risk of trade closure, high market volatility, overnight funding costs, and potential losses exceeding the initial deposit.
Choose Your Assets
You can trade as many assets as possible via CFDs, considering the increasing number of CFD providers we have today. Some of the most commonly traded ones include Stocks, Indexes, Currencies, and Commodities, with Oil and Gold being the most traded of all commodities. However, your choice of assets should depend on your analysis and if these assets are worth betting on.
Have a Trading Strategy
Before opening any trade, ensure you have a strategy on how to go about it, so you do not eventually run at a loss. Know where to close your trades and consider all factors, including the best and worst-case scenarios. This will guide you in creating the perfect trading strategy to work with. With a trading strategy, you can stay focused and not make decisions based on emotions only. It also helps you measure and improve your performance.
Start Small and Learn
Like every other form of investment, if you’re just getting started with CFD, take your time to learn the basics. Most CFD providers readily offer a demo account to allow traders to test all the trading tactics they know without risking their money. Always start with this and see how well you can do before you invest actual money.
Who Can Trade CFDs?
Anyone can trade CFDs as long as they are interested and understand the basics. However, it is often advised for beginner traders to stay away, as they will likely not understand what moves the market enough to make solid predictions. Beginners can leverage helpful resources like the Beginner’s Guide to Learning CFD. On the other hand, they can also seek the help of an expert and experienced brokers to avoid making mistakes.
Bottom Line
If you end up trading CFDs, ensure you diversify your portfolio and not put all your eggs in one basket. This will help reduce your risk of losing all your assets at the same time with nothing to fall back on.
