CFD trading is the activity of trading contracts for difference with a broker. CFDs (Contract for difference) are derivative products in which you can trade on the difference between a certain asset’s set starting value and its closing value. By using a contract for difference, which is basically just a contract between a buyer and seller that specifies a certain purchase price and allows for profits or losses based on the change in the price of the underlying asset during a specified time frame, a trader can participate in a financial market with a smaller initial investment.
Since their introduction in the early 1990s, CFDs have become increasingly popular as investors appreciate the lower capital requirements. They allow investors to participate in markets they may not have had access to previously because of large margin requirements or regulatory issues. CFD trading gives traders the ability to go long or short on an asset, and in the U.K., traders can avoid the stamp duty since CFDs are derivative products.
CFDs are very reminiscent of binary options. This is because binary options are a form of CFD, with some noticeable differences. The first difference being that the potential return or loss can vary depending on how much movement occurs. In trading binary options your potential return is predetermined and dependent solely on your initial invested sum and making a correct prediction. With CFDs, however, there is the additional element of the difference. The larger the difference becomes the greater the potential return or loss.
When trading CFDs you predict your chosen asset’s movement in the market. As you do in traditional trading, you Buy when your prediction is a rise in value and Sell when your prediction is a fall in value. This does not mean you are buying or selling the asset because when investing in CFDs you are investing in your right to earn from the asset’s movement not the asset itself. However, it is important to remember that you can lose your investments should the asset price move in the opposite direction from your prediction.
You’ve read a report on Apple that indicates the stock will plummet in the next few days. You then enter our trading platform and watch its behavior on our live, real-time graph and decide you agree. Do you Buy? Or Sell? To Buy would mean the stock needs to go up higher than the Buy price. To Sell would mean the stock needs to fall lower than the Sell price.
When you get started trading CFDs there are a few basic strategies you want to follow to make the most of your trading experience. It’s true that trading the markets can be complicated and will seem incredibly difficult at first, but by following three strategies you can soon get up to speed and hopefully improve your trading success.
These three simple strategies are below:
1. Focus on a small number of markets. With so many different markets available to trade with CFDs you might be tempted to try them all. This often process to be a recipe for disaster. Instead put your focus on no more than three markets initially and you’ll be able to improve more quickly. If you focus on a small number of markets you will have time to research each of the markets in depth each day. You’ll be able to place small trades in at least one and perhaps all each day as well. And with each passing day and each new trade you’ll learn more about what makes that market tick. You’ll see what the normal volumes are, you’ll find out if the market moves more at certain times of the day, and you’ll learn which economic reports are likely to move the markets. This is the best strategy if you want to become an expert in any given market.
2. Decide what timeframe is best for you. Some traders love the excitement that comes from trading very short time frames, but others can’t stand the stress of making split second decisions, and prefer to trade longer time frames. Decide when you begin trading if you’ll be a long term trader who focuses on weekly and monthly time frames, or a short term trader who focuses on daily, or even moves that can occur in minutes. By utilizing this strategy you’ll be a more relaxed trader and a more confident trader as you follow your own personality traits rather than trying to fight your natural tendencies.
3. Have a trading plan. It’s critically important that you don’t just jump into the markets without a plan. Before placing any trade you should have already completed your daily research and know whether you want to go long or short, why you’re planning on going long or short, where you’ll enter and exit your trade, and how much capital you’ll risk on each trade. By having all of this decided in advance you can avoid putting your capital at greater risk than you’re willing to accept. You are also more likely to avoid mistakes that many traders make when they trade without a plan, most notably those related to greed and fear.
These three basic strategies are not only enough to get you started in trading CFDs, they will also serve you well for your entire trading career. Always keep them in mind and if you stray from them focus on getting back to the basic strategies.