CFD Trading Guide: Crucial Tips for Responsible Trading
CFD trading is becoming increasingly popular and for good reason. Due to the volatility of the stock market, the gains can be massive but so can the losses. This is why you need to incorporate advanced trading strategies including short-selling and applying leverage to gain an advantage.
We’ve put together this simple guide to show you how CFDs work, principles you should abide by and how you can get the most from your investment.
A Quick Overview of CFD Trading
You’re probably wondering ‘what is cfd trading?’. Well, this term is defined as contracts for differences.
Think of them as financial contacts that pay you the difference between the opening value of an asset and its closing value. This type of investment doesn’t factor in the underlying value of an asset and only considers the change in price between the time you invest in it and the time you exit.
Unlike stocks and shares, when you invest in CFDs, you don’t really own the instrument but you can profit from its price increment. For example if you put a buy in on $1000 worth of gold, you won’t really own that amount of gold. This is just an investment you’re staking on the price of gold. If it shoots up by 10% then your investment will be $1100.
Top Principles of CFD trading
Only 1% of day traders make profit from their trades. Here are 3 crucial points you need to understand when trading in CFDs, so as to make profits.
Long and short CFD trade sales
With CFD trading you can earn profits from the prices increasing or decreasing. Short selling means opening your CFD position for sale so that you can benefit from a price decline. In this instance, you close your trade using a buy order if you expect the prices to drop.
Long CFD trade sales on the other hand means buying an asset with the aim of profiting from its price increase.
This is whereby an investor borrows funds from a broker so as to trade in CFDs, which are also the collateral for the loan. In case your traded assets are affected adversely, the broker can call you asking that you make a margin payment on your account.
If you’re unable to raise the funds, they can close your position to regain their money.
In 2018 the stock market took a nosedive and the Dow Jones Industrial Average dropped by more than 10%. As a result, traders are now more cautious and use hedging strategies to keep their investments safe and reduce their risks.
Hedging involves taking an opposite investment position so as to offset potential gains and loses that you may incur from a related investment. It doesn’t prevent you from making losses but it reduces this risk considerably.
Enjoy the Perks of CFD trading
Trading in CFDs comes with benefits such as;
- Being able to trade with more funds than you have in your account.
- Extremely low commissions on most sites.
- The ability to short sell and make profits from failing markets.
- Being able to trade in difficult markets like natural gas and crude oil.
- Tight spreads that reduce your costs.
If you’re thinking of expanding from traditional asset classes like stocks, CFD trading is a great alternative.