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Your Expert Guide to Trading CFDs
CFDs (shortening for contracts for difference) have become very popular as a less capital-intensive method of trading stocks, commodities, currency pairs, and indices on the financial market.
CFD trading's biggest advantage is that there is no need to buy the underlying asset at its full face value. This brings about the main question; “How can you successfully trade CFDs?”In this post, we provide a comprehensive guide for trading CFDs.
What are CFDs?
A contract for difference (CFD) is a contract between two parties that agree to pay the difference that arises between the opening and closing price of a selected asset on the market. From the definition, it is clear that it is a type of speculative trading on the price changes for a fixed asset and within a specific period.
The profit or loss is determined after the value of the selected asset moves in relation to the opening and closing price. Therefore, how the selected CFD performs is considered the actual outlook of the selected asset.
Note: When trading CFDs, you are only focused on speculating the price changes as opposed to owning the asset.
Special Benefits of Trading CFDs
Here are the main advantages that you should anticipate when trading CFDs on the market.
When trading CFDs, you get higher leverage compared to traditional trading. However, the leverage that you get largely depends on the selected asset. For example, traders at Capex ZA get a leverage of 1:10 for shares. Note that although high leverage makes it possible to take larger positions with less capital, you need to be extra careful because the losses can hit you very hard.
If you select a good broker, the chances are that you might be able to trade most of the markets. Because of the fast-growing number of markets, most CFDs trade for 24 hours everyday. So, even as you check the preferred CFD, it is also important to ensure you select the broker that offers more assets.
Accordingly, researching a few different brokers in your area online can help you to compare your options - for instance, if you are based in Germany, reading an online review of the besten cfd broker (best CFD broker) can help you to make an informed decision.
To keep the cost of trading low, it is advisable to look for the broker with low CFD fees and charges. Furthermore, the broker should not have hidden charges so that you can easily planyour trades. Make sure to compare several brokers to identify the ideal one for trading CFDs.
4) Fewer Shorting Rules
Shorting is a trading method where a trader sells an asset or security intending to cover it at a lower price. There are some markets that prevent traders from shorting while others have additional rules, such as demanding higher margin levels for shorting. The good thing about CFDs trading is that such rules do not apply because you do not buy the assets.
The best market for you, whether buying household items or trading stocks, is the one that offers greater diversity. No matter what your interest is in stock market, be it commodities or cryptocurrencies, there will be a CFD trading vehicle to use.
Risks Associated with Trading CFDs
While the benefits of trading CFDs are many, they also come with a number of risks, including the following:
Notably, the CFD market is not thoroughly regulated, meaning that trading them involves taking a lot of risks. The best way to deal with the problem is ensuring you select a broker who is committed to delivering value. For example, a good broker should allow you to trade many types of assets, including USA 500, USA 30 stocks, and other top assets. Traders who have used the broker in the past should also have positive feedback.
Another risk associated with CFDs is that, although the high margin levels can significantly increase your profits, it also exposes you to greater risk. For example, if your deposit is $2000,and you are given a margin of 5%, it implies that you are able to access $40,000 worth of contracts. If the market moves against you, it implies that you get a huge loss that can wipe off your deposits.
How to Trade CFDs
One notable thing about trading CFDs is that it is uncomplicated. Even if you are new, it is also
- Step One: Choose the Market
There are so many individual markets that you can select from, be they commodities, bonds, orcurrencies. Make sure to go for the market that you understand well so that you can correctly react to the emerging developments and follow the trend.
- Step Two: Buy or Sell Your CFDs
Once you have selected your preferred market, you can either buy (go long) or sell (go short).So, bring up your ticket on the selected broker's platform to see the current price (the first price is the bid/sell price), while the second is the offer (buy price).
The price of your selected CFD will be based on the underlying instrument's price. Therefore, if you believe that the market will increase, go ahead and buy, or sell if you think it will go down.
- Step Three: Select the Trade Size
This is another very important step, and it involves controlling the size of the investment that you are about to make. While it is true that the price of an underlying asset can vary, it is up to you to decide the amount that you will invest. Note that the broker you select might have some limits on the margin requirements or the minimum amount that is needed to open trade.
- Add Your Stop Loss
To help reduce the risk to your capital, it is important to use a limit order/stop-loss, which is positioned after determining your risk tolerance levels. A stop-loss automatically closes your trade in the event that the market goes against your prediction, allowing you to trade another day.Once you have added the trade and limit orders, it is time to view the market as it unfolds. You can even close some trades and add others.
Trading CFDs comes with many benefits and potential for profits. However, it is important to becognizant of the underlying risk of using heavy leverage when trading them. Make sure also to hone your skills trading CDFs to increase your chances of trading successfully. More importantly, you should work with the right broker who provides greater market diversity and support.