Tips and Tricks for Beginners in CFD Trading
Definitely one of the most popular forms of investment trading, CFD Trading is usually the go-to financial market that most beginners and experts alike. You have definitely gotten information from a colleague or relative that has gone into CFD trading but you did not catch most of the concepts as this is a rather new world you have stepped into, Do not worry though as we have gathered some of the tricks of the trade you will need to know when doing trading CFDs.
Contracts for difference? What is that?
Contract for Difference, also known as CFDs, are derivatives that allow traders to speculate on different markets like indices, cryptocurrencies, forex and commodities, without actually owning the underlying asset. Transactions are made based on the difference between the opening and closing period. What everyone is after with CFDs is its flexibility in trading. Other traders are into CFD trading for the following reasons:
- Leverages are available for trading
- There is no expiry date for the contracts
- Global Financial Market access
- Flexibility for trading in rising AND falling markets
- There is no requirement to buy underlying assets at full face value
- You can hedge risk exposures
However, CFDs that are leveraged are very risky. Levarages will increase your exposure to the market and increase your profit. However, it can also go in a different direction and you can lose more than you actually put in as an investment.
Learn and Research
What are derivatives? These are products that are known to promote efficiency and they provide you access to assets that you would not normally be able to reach. Of course, they are also needed to be handled with caution as they are very volatile. When entering CFDs, you should start looking into the following jargons like Margin, Stop-Loss, Rolling Contract, Lot Size, Slippage and Going Long or Going short. As you get an understanding of the underlying market, it will add on to your knowledge and will be useful in the future for your trading.
Make a Solid Trading Plan
Look into making a trading plan that covers the different facets that you will be encountering with CFDs such as financial knowledge, a time frame, your trading goals, and amount of risks.
As you take note of these factors, you will be able to point out your strengths and weaknesses in trading. This is not just applicable with beginners but a practice for traders with different backgrounds of experience. The longer you trade however, the more you get to tweak your current trading plan to perfection.
The Right Leverage
As mentioned earlier, you may look into leverages as an advantage as it allows you to amass bigger gains from small price movements that will normally not give you the same results. However, you have to bear in mind the possibility that such will not always move to your favor and may go in the completely opposite direction and will lead you to massive losses. You may need to consider a leverage ratio that is very conservative of risk. Rations like 100:1 to 50:1 especially when you are dealing with shares and indices as they have lower liquidity and higher volatility.
Choose a Trustworthy Broker
Look into trading with a peace of mind. Look into a regulated broker that will legitimately ensure the safety of your transactions/money. Other brokers have add ons like educational resources, videos and other material for guidance in trading CFDs. Your broker should have the following aspects:
- Up to date trading platforms
- Wide array of available financial instruments
- License from ASIC, FCA or ESMA regulatory boards
- Different trading tools
- Certified liquidity providers
- Has a demo trading account for practice