A contract for difference (CFD) is a simple security, the value of which depends on the price movement of an asset between the entry and exit points of a trade. CFDs take into consideration only the price movements of assets, not their underlying value. CFD trading is done through contracts between brokers and clients, without any commodity, Forex, stock, or futures exchanging hands.
CFD trading has become very popular during the past decade because it presents investors and traders an excellent opportunity to profit from the price movement of an asset without actually having to own it.
Pros of CFD Trading
CFD trading has its own advantages and disadvantages. Let us first examine the advantages:
- Access to Global Markets:Top-rated CFD brokers give their clients 24/7 access to major markets across the world on a single platform.
- High Leverage:CFD trading involves higher leverage, as much as 50 percent depending on the policies of your online broker. So you can trade on a small capital using leverage. While this can maximize your returns, it can also magnify your losses.
- Free Trade Execution:CFD brokers profit from the spread and do not charge fees or commission for executing trades. The size of the spread depends on the volatility of the asset, but some brokers also offer fixed spreads.
CFD brokers also offer orders such as limits and stops although some of them charge for guaranteed stops.
- Shorting is Permitted:You can short CFD instruments any time you wish without any borrowing costs as you don’t actually own the underlying asset.
- Wide Range of Trading Options:Online brokers offer CFDs across assets such as indices, treasury bonds, Forex, commodity, sectors, and stocks.
- Unrestricted:CFD trading is not restricted by minimum capital requirement, number of trades per day, and so on.
Cons of CFD Trading
As wonderful as CFD trading may sound, it has some disadvantages too, and some of them are as follows:
- CFD Trading is Risky:You need to monitor your CFD trades as closely as possible because they tend to move at a rapid pace. High leverage, while being an advantage, is also one of the greatest disadvantages of CFD trading. While high leverage can maximize your profits, it can magnify your losses as well. Although CFD providers do offer stop loss limits, they cannot protect you from losses, especially in case of high volatility or market closure.
- Not Well Regulated:The CFD trading industry is not well-regulated, which means that you are at the mercy of your online broker. You should, therefore, choose a reputed broker and sign up only after you have investigated it properly.
- Brokers Benefit from the Spread:You cannot profit from a small move as the broker benefits from the spread. This can decrease your profits and increase your losses. While traditional markets are associated with commissions, fees, high capital requirements, and regulations, CFD markets cuts down profits by making traders pay spreads.
Tips and Tricks for CFD Trading Success
If you have decided to try out CFD trading, here are a few tips and tricks that may lead you to success:
Trade on a Demo Account
Avoid plunging headlong into live CFD trading. Instead, start CFD trading on a demo account. All top-rated CFD brokers allow their clients to get started with a demo account.
You can use a demo account to learn more about CFD trading without risking a single penny of your hard-earned money. Even if you are an experienced trader, you can use a demo account to test a new trading strategy.
You can move on to live trading whenever you feel confident about doing so.
Learn and Research
You can never complete your CFD trading education as there is always a lot to learn. If you feel that you are thorough with the basics of CFD trading, it is time to explore the latest strategies. Do not move on to live CFD trading before finding out everything about market orders, stop loss limits, and other basics. And even after moving on live CFD trading, do not stop your education as there is always a lot to learn.
Limit Leveraging
As we already mentioned, leverage is the biggest advantage of CFD trading. But it is also its biggest disadvantage. If you are new to CFD trading, you are in no position to absorb the risks associated with high leverage. In such circumstances, you should limit leveraging as much as you can.
Adjust Your Trade Position
Some online CFD brokers do not permit traders to limit leveraging. In such cases, you can minimize your risk by adjusting your trade position. For example, you want to purchase shares worth $1000 at an online broker that offers a default leverage of 5:1. Since you cannot lower the leverage, you can adjust your trade position to $200 so that you would still be holding shares worth $1000.
Be Realistic
If you have dreams of becoming a millionaire overnight by trading CFDs, get rid of them at the earliest possible. Instead, develop a realistic, rationalistic approach. Set clear and achievable goals that will help you to not only survive in the CFD trading world for as long as possible, but also to ultimately earn a living out of it.
To set clear-cut goals, you should know exactly what you want and then focus on it. You should make it a point to eliminate every distraction that stops you from achieving your goals.
Conclusion – Select a Good Online CFD Broker
This is the most important CFD trading tip of all as you can become a successful CFD trader only if you select a good online CFD broker. There are plenty of CFD brokers in the industry, each standing in a class of its own.
We recommend reading multiple reviews of many CFD brokers and thoroughly researching them before zeroing in on a broker to sign up at. Explore the broker’s ownership, licenses, fee structure, security measures, minimum capital requirements, customer support, and others before you actually register and part with your hard-earned money.
