Contract of difference trading or CFD trading is one of the most popular ways to trade the financial markets without having to physically own the assets you buy and sell.
A CFD is a binding agreement or contract between the trader and the broker that allows a trader to speculate the financial instruments like forex CFD or indices CFD and make profits based on the difference between the current value of the asset and its value at the time the agreement was made. If you are searching for additional info on cfd metatrader 4, look at the earlier mentioned site.
What Is CFD Trading?
CFD trading involves an agreement or contract that is made between the trader and the CFD brokers, that allow traders to profit from the difference in the value of the financial asset between the time the contract started and ended. Read More
In CFD trading, CFDs are considered as the derivative form of trading that derives its value from the price change of the underlying asset and profit from those changes without having to actually hold any underlying asset. Are you hunting for pip value calculator? Look at the earlier discussed site.
Online CFD trading allows traders to earn returns that are based on the price change without actually owning the underlying asset. Online CFD trading has eased and widened the trading prospects and include financial markets like CFD forex, CFD indices, and CFD cryptocurrencies that can be used by the CFD traders.
How Do CFDs Work?
CFD trading does not involve any physical buying or selling of the asset, instead, traders bet on the direction of the price movement, whether it will go up or down. Depending on the anticipation made by the traders, they take buy or sell positions. The difference between the buy price and the sell price defines the profit earned by the trader. Visit the following site, if you are searching for more details about forex white label provider.
For eg, instead of buying or selling gold physically, CFD traders simply speculate the prices and bet on it. Traders either bet on upward or downward movement of the prices and if the traders sees the prices going up, they hold the position for sale. Then, the total difference between the purchase and the sale price is netted off and the amount is settled in the trader’s CFD trading account. This difference tells whether the trader has made profits or lost. If you are looking for additional info on trading margin calculator, view the mentioned above website.
Buying Long and Short In CFD Trading
Traders go long or short based on their anticipation of whether the prices will go up or down. If the traders anticipate the prices to go up, they buy long and if the traders anticipate the prices to go down they sell short. Every pip movement in the price can add to the profits. However, the prices in CFDs move quite fast and the prices can change rapidly so traders generally do not hold their position for a long period of time. The rapid changes in the prices makes both going short and long highly profitable.
Advantages of CFD Trading
- Leverage: Leverage offered to trade CFDs is much more than what it is offered in conventional trading. Higher leverage accounts for extra market exposure and increases the potential profits. Also the margin required to open and hold the position is much lower than what it is in conventional trading. Traders can opt for preferred leverage depending on the leverage that is offered by their brokers.
- Increased Liquidity: Online CFD trading and CFD broker that provide direct access to the liquidity providers offers high liquidity that ensures enough availability of buyers and sellers.
- Trading short or long: Traders not only profit from going long but also by going short. This means traders can trade on either side of the market and make good profits in the upward trend as well as in the downward trend.
- There is no expiration date of the contract: The agreement or contract in online CFD trading doesn’t have an expiration date which means traders can hold or sell it at any preferred time.
- Lower trading costs: The trading costs in online CFD trading is much less as compared to conventional trading. CFD brokers generally make money from the spreads and commissions that are charged by them. These charges are fair and reasonable with genuine CFD brokers.
- Ability to trade small accounts: CFD traders can trade on small CFD accounts with smaller lots. Many CFD brokers provide CFD accounts that allow traders to trade with flexible lot sizing like Micro lots, Mini lots and Standard lots. This makes CFD trading for beginners easy and less risky.
Disadvantages of CFD Trading
- Risk of potential losses: Leverage works as a double edged sword that can help in capitalising the trade and magnifying the profits. However, it can also result in losses and can leave traders in debt to the CFD broker.
- Overnight funding costs: CFD trades held over-night are charged with funding costs if you are holding a long position. However, funding rebates are received from the CFD broker if the position is held short.
- High volatility: High volatility in CFD markets can result in quick price movements affecting CFD assets making it difficult to execute the trade in between two prices. Stop-loss order and its execution can be affected due to high volatility in the CFD market and might result in placing the stop loss order in an unfavourable level.
Prerequisite Guide for CFD Trading
There are certain factors that need to be considered before traders opt for CFD trading. Some of these are:
- Develop your knowledge: CFD trading for beginners can be highly overwhelming. Traders must understand what CFD trading is and how it works. Understanding the factors involved in CFD trading will help in making better CFD trading decisions.
- Build a Trading Plan: Having a learning attitude is the crucial component of a successful trading experience. Learning must include knowledge about yourself and trading goals. Having a trading plan will avoid traders from falling into the pit of emotions and allow traders to make rational trading decisions.
- Stick to your CFD trading strategy: Trading strategy is a methodological outline of entering and exiting the trade that must comply with the trading style of the trader. It is crucial to stick to the trading strategy in order to minimise the impulse of trading under the influence of emotions.
- Analysing the market: It is important to analyse the CFD market. Traders can decide which type of analysis can be preferred by the trader based on their trading strategy.
- Management of risks: The first thing to be considered is the position size of the trade. Do not open a large trading position if you can’t afford to lose that money. The second thing is to place stops and limit orders. These predefined exit levels can help in protecting the capital.
- Practise with demo: Practising on a demo account is a great way to learn CFD trading for beginners. They can practise executing their trading strategy with virtual funds. Demo CFD accounts allow traders to experience a live but risk- free trading environment.
Bottom Line:
Although there are certain risks involved in CFD trading, investing time in strengthening the knowledge and developing skills can limit the risks and result in good returns. Traders must take their time understanding CFDs and practise trading strategies on demo first before proceeding ahead.
