What are CFDs?
CFDs of contracts for difference are contracts between sellers and buyers of various financial assets. They stipulate that the buyers pay the sellers the difference between the present asset value and the purchasing price.
Key Features of CFD Trading
- Margin and Leverage: When opening a position, traders don’t pay its full value; they only put in a deposit. This is leverage trading (your deposit is the margin).
- Commissions and Spread: When trading CFD, you’ll see two prices on the market (the buy and sell price). The difference between these two prices is the spread. The cost of CFD trading is part of the spread, which means no commissions (mostly).
Getting Started With CFDs
Newbies should start with a demo account and perfect their skills. The demo account lets you try various strategies on different markets without risking your capital.
Opening a CFD Trading Account
Start by looking for a reputable broker with better offers and services. After picking a broker, you can open an account and fund it using the available payment methods.
Understanding Market Orders and Position Sizing
With CFD, the number of contracts you plan on selling or buying determines the position size. Each contract represents a certain quantity of the underlying asset.
Before placing your trade, you should consider your trading strategy, which includes the limit and stop orders. These orders should be determined before you press “SELL” or “BUY,” which is a market order.
Basic CFD Trading Strategies
Long and Short Trading
Unlike trading shares, CFDs let you speculate market prices in both directions. This means that you can either go short or long. Going long means purchasing CFDs and profiting when the price goes higher and vice versa.
Managing Risk With Stop-Loss Orders
Leveraging can magnify your losses and even eat up your margin, so you should always use a stop-loss order.
Using Leverage Wisely
Before setting your leverage, make sure you can cover the margin. Remember, it increases your chance of losing your capital.
Practical Tips for Beginner CFD Traders
Educating Yourself: Resource and Learning Materials
Take advantage of the trading forums, webinars, and online courses to learn more about CFD trading. Some brokers offer free learning materials for newbies.
Keeping Track of Market News and Events
News events like GDP reports and interest rate decisions can affect the market. You can use the economic calendars found online to track the economic news.
Developing a Trading Plan and Sticking to It
Every successful trader has a trading plan that works for them. So you should develop yours and stick to it. You should consider your money management rules, trading strategies, and risk tolerance when developing your plan.