The Basics Of CFD Trading

People are looking for ways of making some extra money and for some of them CFD trading has turned out to be a feasible option. Contract For Difference trading commonly referred to as CFD trading is simply speculating on the movement of an asset price. It mostly consists of an agreement or contract to exchange the difference in the value of a particular asset. This could be currency, commodities, equities or indexes.

CFD trading has become more popular over the years. This CFD market is now one of the largest trading markets in the world. Platforms have enabled the ability to trade CFD more easily.  CFD providers such as CMC markets facilitate multiple instruments to trade CFDs efficiently. Trading platforms provide mobile applications providing basic trading functionality. These platforms include in-built risk management tools. There are several trading platforms to choose so ensure you make a well-informed decision before deciding on one.

The basics of CFD trading

CFD providers offer two types of trade models: market maker and Direct market access. Trading CFDs has its own risks. Knowing how to manage those risks are key when trading CFDs.

CFD Trading On Margin

CFD trading was initially for big institutions but was later introduced to retail investors. This change resulted in CFDs becoming a more widely traded product. Retail investors were suddenly given access to the ability to trade on margin. A person gets to trade without having to physically buy the commodity. CFDs are often leveraged financial products. That is, they are effectively classified as debt. Leverage is the small capital need to take big trading positions. Trading on a margin is quite risky. It can magnify your gains or your losses. It is not advisable to trade on money you cannot afford to lose. Start small then grow as you make profits to reinvest.

Trading Strategies

Finding a good broker is crucial and will affect the results of your trade. Some people have compared CFD to gambling. Much like a casino, the investor tends to have greater losses than profits.

One suggestion is to consider using stop losses. This functionality is provided by all CFD providers. Stop losses are used to reduce risk by closing a losing trade once a market passes a pre-defined level. The level that you set automatically close trades when the market moves against you. This will help you to limit your losses.

Another suggestion to protect your downside is to only include money in your account that you can afford to lose. When setting up your trade, make sure you size it appropriately to your capital. You need to think about the worst case scenario. Were the trade to move against you, if your maximum loss is greater than your capital then you’re risking a margin call. This is when the CFD provider requires you to add more capital into your account. This happens when your losses are greater than your capital. Protect yourself by limiting each potential loss to less than your capital base.

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