Things You Need to Know to Trade CFDs Online Like a Pro in 2021
If you are a quick-thinking, risk-loving individual looking for a way to earn a living and gain financial independence, online CFD trading is one of the options you should consider exploring. The most significant advantage of CFDs and the prime reason why so many new and experienced users choose this form of trading is that you do not have to pay the entire value of the underlying asset to be able to trade it.
This post seeks to educate readers on the basics of CFD trading and explain which tools and resources you will need to make your trading career a success.
What Is CFD Trading?
Contracts for difference (CFDs) are high-risk financial derivative products that let users speculate on predicting short-term movements of the asset price across a variety of financial markets, such as commodities, shares, indices, currencies, etc.
CFDs are leveraged products, which means opening a position here does not require traders to deposit the entire value of the trade – only its small portion. This particular feature is known as trading with leverage or trading on margin. Even though margin trading can increase your original investments considerably, it also makes your losses more substantial.
Here are some of the chief benefits of trading CFDs:
- Leverage. It allows you to cover only a small part of the entire value of the trade. Some CFD brokers will accept a margin investment of as little as 0.2%. The lower the margin, the less you need to fund.
- Availability of risk-management tools. In CFD trading, it is possible to reduce potential losses by implementing a timely and efficient risk-hedging strategy.
- Opening positions in both bear and bull markets. Whether the market is falling or rising, CFD traders can capitalize on both types of fluctuations.
- A broad range of trading markets. CFD traders can choose from a variety of markets to trade on. This includes stocks, indices, real or digital currencies, shares, forex, commodities, etc.
- Flexible contract sizes. Considering the potential volatility of CFDs, most brokers today offer their traders a vast assortment of flexible trade size options. Smaller CFD contract sizes allow traders to access the market with a very modest deposit.
- Reduced trading costs. CFD brokerage fees are usually lower than those associated with other trading methods. Unlike traditional share dealing, CFD investors do not have to pay stamp duty on their trades since no change of the physical owner occurs here.
How to Start Trading CFDs Online?
Now that you know what CFDs are and how they work let us see which five main steps CFD trading includes:
Step 1: Choose a market.
With there being over 4000 global markets where you can trade CFDs today, finding the one that best meets your trading needs and style may take some time. The choice of instruments to trade is impressive, too, and includes anything from forex and treasuries to stocks, indices, and energy.
Step 2: Choose whether you want to buy or sell.
Depending on how good their observational skills are, CFD traders can choose between selling (going short) and buying (going long).
When they want to speculate on predicting a drop in the value of the asset, traders take short positions. If their forecast is correct, they will make a profit whose amount equals the difference between the asset’s opening and closing prices. To speculate on an increase in the value of the asset, traders need to take long positions.
Step 3: Decide on the CFD trade size.
Decide how many CFDs you want to trade. Note that the larger the chosen trade size, the larger the margin will be.
Step 4: Use the stop-loss order feature.
By adding a stop-loss order to your trade, you choose to automatically close the position when the market has reached a certain point. This essential risk-management tool is designed to help protect you from excessive loss in a trade.
Step 5: Monitor the situation and close the position when the time is right.
By closely monitoring the market situation, you will be able to see how prices fluctuate, changing the value of your trade. Track essential statistics in real-time to recognize the moment your trade has to be closed, giving you maximum profit or minimum loss.
The Recipe for Trading Success Lies In Preparation and Focus
Trading CFDs online is not a path for everyone, and some end up losing big in this moneymaking avenue. However, if you learn how to play the game expertly and equip yourself with all the right tools, skills, and strategies, your chances of making a profit will increase considerably.
Do you think CFDs are a sound and reliable trading instrument? Which qualities do all good CFD traders have in common? Help others improve their skills by sharing your best CFD trading tips in the comments!