What exactly is CFD trading?
CFD trading, or Contract for Difference trading, is a contract between two parties which agree to exchange the difference between an opening price and a closing price of that particular contract. It had become very popular in the recent years, due to technological developments and the possibility of trading a wide variety of instruments of over 4000+ global markets. It allows you to speculate on the price movements of currencies, stocks, commodities and bonds, regardless of whether the prices are falling or rising.
The ability to sell short had made CFD trading attractive, since one can hedge his investments by allocating capital to buy CFD short-sell contracts.
CFD trading advantages
Among the most important strong points of CFD trading, we can highlight the followings:
- Flexibility – you can profit from both rising and falling markets.
- Leveraged Products: CFD contracts use leverage, so you need less capital to buy a particular instrument. It is very helpful when buying contracts that otherwise would have a higher price.
- Hedging Opportunity – in order to protect a long position taken on a particular instrument, shorting it using CFD contracts can protect you in case the market starts trading in the other way.
How does CFD trading work?
When you open a CFD position, you first need to select the amount of contracts you would like to trade. Also, you need to choose to direction you want to trade. If you believe that particular instrument will rise, you select buy and sell in case the opposite scenario applies. In case the price will fluctuate in your favor you will make profit and in the other case, you will encounter loses.
Leveraged products- opportunities and risks involved as well
Although we mentioned leverage can help you invest even though you have limited capital available and it can help increase your profitability, it is also worth to mention that high losses can also intervene.
It is very important that you also have, besides your trading strategy, a risk management model that can help you reduce your downside, when the market moves against you and that can also help you increase your profitability.
To summarize,CFD trading can be a very effective way of investing, if you have the proper knowledge, a tested strategy, a risk management system and the right mindset that will help you to incorporate those things into a daily routine that will enable you to generate consistent profits .
Risk Warning and Disclaimer
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. No information or opinion contained on this site should be taken as a solicitation or offer to buy or sell any currency, equity or other financial instruments or services. Past performance is no indication or guarantee of future performance.