Explained: CFD Trading

Explained: CFD Trading

  • Business
  • October 31, 2020
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  • 70
  • 5 minutes read

It can be tricky or a tad bit confusing for any startup trader that has come into interaction with CFD. We cannot blame you, given that there are different markets out there that you can heavily invest on but there is something great to be said about CFD trading. With that being said, you can check out the different facets that encompasses this form of trading and how you can start looking into it as your primary trading type to invest your hard earned money in.

Margins

In CFD Trading you start with trading on margins. This means you are able to gain a certain amount of money with just a small amount of capital that is a fraction of the total trade value. This is a good thing, especially for people who trade CFDs since the small requirement capital would mean you are able to save a portion of your money and can be either set aside or can be used to expand your portfolio.This is one of the many reasons why novice traders would start getting into CFDs as the gains can be immensely huge. But bear in mind that this can also go both ways and you might be able to lose more than you can actually afford.

Spreads

In terms of CFD trading, you are going to be always given two prices based on the value of the underlying asset which is the bid price and the offer price. This is also known as the buy and sell price. The bid price will always be at a higher value compared to the current underlying value while the offer price is always lower. Given those two prices, there will be a difference which is called the spread.

Going short and long

As you open a CFD position, you are able to select different types and number of contracts you would like to get. If you believe that the price of the asset you got will increase, then you may opt to open a long or buy position and gain some profit from it if you project that the market will move within your expectations. If you however, think that the prices will decrease, then you should open a short or sell position and ALSO profit from the market if it also leans towards your projections.

Risk management

In order for you to refrain from losing a certain amount of money during your trading days, you may opt to set a limit order so you can automatically close your positions in a certain profit level.

This does not only save you from possible losses but also gives you time away from observing the market as it will automatically stop trading according to your preferences. By setting up limit orders would also mean you are minimizing the possibility of you holding on to a supposed winning trade for too long based on your reluctance to trade or even tunnel vision.

When you place a stop-loss order, you limit excess losses that you may make away from your computer. This is the point where your position will automatically close as a fail safe system in case the prices drop below your entry point. This is a very important risk management tool and should not be ignored. Anybody who would save their time for other matters, away from trading, should set this up as this is any trader’s safety net in case the market does not go their way.

Stop-losses are very crucial and even the most seasoned trader would still use them to this day. It may not sink to you at the early stages of your trading career but you will eventually realize how losing your money in a matter of seconds can be very painful. Bare in mind that the CFD trading market is volatile and you should always have your own little insurance

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