CFD trading has become more and more popular as of late. Many traders use CFDs to hedge their current portfolios.
In this article, I will explain about CFD trading and why you might want to consider this form of trading.
|Broker||Min Deposit||Max Leverage||Spread||Join|
|BDSwiss||$100||1:400||From 1.2 pips||Join Review|
|Opteck||$250||1:200||Fixed Low Cost||Join Review|
|ETXcapital||$250||1:400||Avg. 1.2 pips||Join Review|
|Direct FX||$250||1:400||From 0.2 pips||Join Review|
|Core Liquidity Markets||$200||1:400||From 0.5 pips||Join Review|
What are CFDs?
CFD stands for Contract For Difference. It is a form of trading that allows you speculate on fast moving financial markets. It is also a method of trading with relatively low amounts of money and getting “spotted” the difference.
What I mean by this is, CFDs are leveraged. When trading CFDs, you are trading on a margin which means you only are required to deposit a percentage of the full trade amount. This means you can gain large gains but on the flip-side, you can also suffer heavy losses.
When you believe an asset will rise in value, you would find what the entry percentage is and deposit that amount along with the commission charge of the broker.
If within that day the asset rises, you can sell and pay the exit commission charge and you gain the excess in profits.
Some traders also use short-selling strategies in falling markets. But, if the asset rises, you can incur losses.
CFD vs Binary Options Trading
There are various pros and cons to both forms of trading, but many traders find CFDs to be less complicated and also easier to generate larger profits.
With CFDs, you have:
- No expiry times so you can hang on to them as long as you feel the need.
- No pricing methods that are hard to understand.
CFDs go with the listed asset price. That is where they are easier to understand. Some of the pros and cons are:
- 1. If you are clear on how to trade stocks, CFDs will be the same. Binary options are not.
- 2. The asset pool is much larger.
- 3. The advantage of hedging your current portfolio.
- 4. As mentioned above, no expiry times.
- 5. CFDs do pay dividends if you bought before ex-dividend.
- 1. You cannot “write” options whereas binary options trading open more trading strategies.
- 2. Losses can climb higher than what you have deposited.
Assets That Can Be Traded In CFDs
Essentially it depends on the broker you are using, but nearly any asset that can be traded on in other formats:
The broker you choose will surely have a list of assets you can trade CFDs on.
The Risks Of CFD Trading
While I believe that CFD trading is a wise method, it does carry risk. But risk is a part of the equation when you are seeking profits.
Some of the most common risks that have harmed traders are:
Overtrading has been the downfall of many. It normally happens when a person has been winning and starts to trade much heavier with the thought they are “on a roll.”
Because CFDs are a leveraged trading format, this can lead to a loss of everything gained and more.
Not only are “winning rollers” getting into the overtrading trap, but traders who have suffered several losses can also get caught in this bad risk with the thought they will make up their losses.
The whole issue comes down to not allowing emotions to control your trading strategies.
Fighting The Trend
This mainly comes down to short selling. Many “rookie” traders have thought they could predict the downturn of the trend and have lost thousands upon thousands of dollars “bucking” the trend.
Someone said “The trend is your friend until it bends.”
You will see better results if you stick with the trend. It will fail from time to time but overall, you are safer doing so.
Trading In Unfamiliar Grounds
The successful traders are familiar with the assets they are investing in. If you have not researched and watched that asset, it is wise to not trade in it.
Just a short example… There was a man that was quite successful trading the Aussie Dollar against the British Pound. He started assuming he was the “King” of currency trading and decided to jump in the Japanese Yen against the American Dollar. Using similar strategies and assuming the market would react in a similar way, the man soon discovered he had lost all the profits he had made in the last year and more.
Trading Beyond Your Means
I know I have mentioned it several times, but CFDs are a leveraged trading system. So you start with $2,000 and have $40,000 in your bank account. You take out a trade with your $2,000, but it is actually worth $60,000. And suddenly while you are sleeping, the market drops leaving you out the $2,000 and owing the broker $10,000.
Is that $10,000 you can afford to lose?
You want to make sure you are taking risks you can handle.
There are a wide range of CFD brokers but not all are created equal. It is wise to use a licensed and regulated broker.
Australia – Australian Securities and Investment Commission (ASIC)
ASIC regulated brokers:
- Core Liquidity Markets
United Kingdom – Financial Conduct Authority (FCA)
FCA regulated brokers:
- IG Markets
- FX Pro
- ETX Capital
United States – Commodities and Futures Trading Commission (CFTC)
CFTC regulated brokers:
- Interactive Brokers
There are other regulators in other countries too that regulate CFD trading.
I hope this helped you understand CFD trading more. If you have any questions or want to know of regulated brokers in your country, just ask and I will guide you.
Trade smart and profit huge!