Learn How To Trade CFDs Successfully And Profitably
Anybody who’s interested in trading CFDs must wonder how to trade CFDs successfully.
They have heard all about the risks involving CFDs and the effect leverage has on losses.
Well, this is why we are writing this guide to help you trade CFDs profitably and with confidence.
But at the same time, they present traders an opportunity to trade all kinds of assets without owning them.
Getting started with CFD’s can be quite confusing due to this. Instead of the assets, you’ll be purchasing and selling contracts.
This way you’ll be speculating their price movements and profit.
But first, you need to know the basics of CFD and how to profit from both falling and rising markets.
Well, this is why we are writing this guide to help you trade CFDs profitably and with confidence.
Let’s start with understanding what CFDs are.
What Are Contracts For Differences (CFD)?
CFDs are leveraged financial products that are traded over the counter.
CFD brokers and traders form this contract between them.
This contract stipulates that after the trading position is closed, you exchange the difference between the opening and closing price of the asset being traded.
The types of assets traded in CFDs include shares, stocks, cryptos, indices, currencies, and commodities.
One important aspect of CFDs is the lack of ownership.
Traders don’t own the underlying asset and instead, they bet on its price movements.
Therefore any benefits or responsibilities related to asset ownership do not apply to CFDs.
Another important element of trading CFDs is a marginalized deposit.
Here, you don’t have to pay the full cost of the transaction to start your trade.
You pay a small percentage of the total cost which is known as margin.
The ability to trade on margins makes CFDs leveraged products.
Leverage is what makes trading CFDs both profitable and risky at the same time.
Opening positions using small deposits to make substantial gains is what makes CFD trading exciting and intimidating for beginners.
Let’s understand how a CFD trade works.
CFD trading takes place through a trading platform provided by brokers.
A trader goes through the CFD portfolio and chooses on which asset he wants to trade.
He then selects the number of units (contracts) of that asset.
He may add any risk mitigation features such as stop-loss or take-profits.
Finally, he chooses to go long or short, i.e. he decides to open a buy or sell position.
For example, you choose to deal with broker AAA for CFD trading.
You choose to go long on CFD shares from XYZ Corporation as you anticipate its price will increase.
Each contract is worth $15 and you decide to buy 50 contracts making your total transaction value at $750 ($15 x 50).
The margin is set at 4% which means you only pay $30 (0.04 x $750) to open your position.
You close your position when the price increases to $18 making your total profit stand at $150 ($3 x 50).
Say, if the price had dropped by $3 instead, you would’ve faced a loss of $150.
Thus by investing a small amount, you are able to deal in positions of high value. Let’s take a look at some of the advantages and disadvantages of CFDs as it is crucial to know them before stepping into trading.
Advantages Of CFDs
Why should you invest in CFDs? What makes it more attractive than other forms of trading?
Let’s see what advantages it has to offer to traders.
As we have seen above, you can open a CFD position by paying only a fraction of the total cost.
This initial deposit is called margin. Hence even small traders can invest in CFDs.
With marginal trading, you can enjoy increased returns, trading flexibility, increased buying power, and less taxes.
This point goes hand in hand with the previous one.
As you deposits are marginalized, you can earn big by investing small.
Leveraged returns make CFDs very attractive and lucrative to all traders.
You are risking small amount of investment for earning large profits.
No hidden fees or stamp duties
There are no hidden fees charged unlike other forms of trading.
Since there is a lack of ownership of assets, there are no stamp duties on CFDs.
The only charges in CFD are the spread and the rollover fees.
A vast range of trading assets
Unlike forex trading, which only deals with currency pairs, CFDs are traded like shares, stocks, Cryptocurrencies, indices, commodities, and many more assets.
This allows flexibility to traders on their decisions.
Traders can also diversify their asset portfolio when trading CFDs with the variety of trading assets at their disposal.
Risk management facilities
There are some risk management features offered by CFD brokers.
Stop-loss and guaranteed stop-loss orders close your positions after the price of the asset you’re trading reach a certain level.
Take-profits ensure closing your position after your profits have reached a certain level.
This will ensure the losses are controlled and profits being secured.
Profit from both long or short position
With CFDs, you can go both long or short depending on the market conditions.
When the market dips, go for a short position and sell.
When there will be a price rise, go for a long position.
Thus your strategy is not limited to one direction. You can profit from both rising and falling markets.
Disadvantages Of CFDs
We have seen the numerous benefits CFD provide. There are some disadvantages and shortcomings in CFD trading.
We will analyse the shortcomings of CFD trading in this section:
A risky way of trading
CFDs are leveraged financial products and hence losses are magnified.
You can lose a lot more than you invested.
If traded incorrectly without proper strategies, CFDs can empty your balance fast.
Just as leverage offers attractive profits, the losses can grow exponentially too.
No ownership benefits
When you buy shares of a company, you also own a part of their company.
This is not the case for CFDs. You don’t own the assets, hence don’t own or take part in company decisions.
Some people mistake CFD assets as assets to own but in reality, you are simply purchasing contracts to speculate on its price movement.
Probability of overtrading
CFDs are easy to get started due to low investment costs and ease of trading.
You can trade from anywhere and anytime and it takes little times to conduct trades.
This eventually leads to overtrading. Overtrading can lead to financial disasters.
With CFDs, you lose 70-80% of your trades on average. This means, by overtrading, you are simply increasing your chances of losing.
Trading CFDs requires experience and knowledge
Trading CFDs successfully is no joke! Many think CFD trading is like gambling and they trade on luck.
This is not true at all. The more experience and knowledge you have, the chances of you succeeding increases.
This may discourage new traders to engage in CFD trading.
The CFD market, especially the forex and crypto CFDs, are very volatile.
This requires constant monitoring and attention. You cannot open a position and forget about it.
This applies especially when you trade on a short-term basis. The price movements are so rapid, it becomes quite difficult to predict the market.
This may discourage many traders to try CFD trading.
How To Trade CFDs
These are the steps you have to go through to successfully conduct a CFD trade:
CFD trading takes place through a trading platform. These trading platforms are provided by brokers so you have to choose the right broker first.
The most important factor you need to consider when choosing a broker is regulation. Regulation ensures the broker doesn’t scam its traders. The minimum deposit fees should be affordable.
Other things to consider are the range of instruments offered, demo account, and platform must be easy to use.
After you have chosen your broker, it’s time to create a CFD account. Most brokers offer to create an account for free.
You can either open a demo account or a real account depending on your preference and experience. At least for beginner traders, we would recommend to try out a demo account first.
Take a good look at the trading portfolio of the broker and determine which asset you want to trade.
Are you familiar with the price movements of the asset?
Is the asset profitable to trade or there are better alternatives?
These are some of the questions you need to ask yourself before you jump to a conclusion. Choose the number of units you want to trade.
Your trade is set and all you have to do is choose to go long or short to open your position.
Watch the market feed carefully and watch where the trend is heading to.
Brokers provide certain risk management features to traders. These are not compulsory to use but we recommend that you do.
There are stop-loss orders and take-profit orders which you can apply for free of cost. However, if you want to add a guaranteed stop-order loss, you would be charged a premium by your broker.
The difference between a regular stop-order loss and a guaranteed stop-order loss is that it guarantees to close your trade irrespective of the market conditions.
You have selected your preferred asset, the lot size, added stop-losses and take-profits and finally chosen to go long or short.
Your trade is placed successfully and now all you have to is monitor your position. Remember the CFD market is volatile and unpredictable. You don’t have to sit in front of your computer screen constantly watching the live market feed.
Brokers nowadays offer their platforms in mobiles too and that makes it convenient for traders. You can monitor your trades on the go.
If you have met your profit goal, you can close your position. Or if the opposite happens, i.e. the moment the market moves against your position, you can close your trade.
To close a trade, you have to open a position in the opposite direction to your initial position. For example, if you opened a long position, to close the trade, you have to go short on the same asset.
Is CFD Trading Permitted In All Countries?
Unfortunately, not all countries allow CFD trading. You can trade CFDs in Australia, Japan, Canada, the United Kingdom, South Africa, New Zealand, Switzerland, and many other countries.
The countries where CFD is considered illegal to trade include the USA, India, Hong Kong, Brazil, Belgium etc.
So the question arises, how can you trade CFDs in the United States or other banned countries?
One solution is to set up an account in an offshore company in countries where CFD trading is allowed. Then use that account to transfer funds after dealing with the brokers.
How To Trade CFDs Successfully And Profitably
Learning how to trade CFDs is just the tip of the iceberg. You need proper strategies and a solid plan to consistently make profits from CFD trading.
We will list you the best tips and tricks to take your CFD trading game to the next level.
Research, Research, and more research
We cannot stress this enough to new traders. Educate yourself on CFD trading.
This is the first step to greatness in trading. Without adequate knowledge and information, you will be like a lost man in the desert.
There are plenty of sources for knowledge on CFD trading and trading in general.
Many brokers have a dedicated educational section where they provide trading tips, ideas, information, video tutorials, signals, forecasts, and much more.
Our CFD articles will be a perfect start for newbie traders
Open a demo account
Whatever you have learned must be put into practice. It does not matter if you are a new trader or an experienced one; there is no reason for you to not open a demo account.
It is free of cost, takes a minute to get started with one and best of all, it emulates the real market conditions.
You can trade using virtual money so there is no element of risk.
A demo account is a perfect place for new traders to practice trading and get familiarized with the platform interface.
Keep practicing until you feel confident in placing and managing trades.
As for experienced traders, they can try out different trading strategies and see what works best for them.
Invest a small amount initially
When starting out, don’t invest all your savings into trading CFDs. Even if your capital is big, it would be wise to start small so that you can recover from losses.
CFD traders lose money nearly 80% of the time. Remember that CFDs are leveraged products and your losses can eat up your entire balance.
Small losses won’t discourage you from trading. Instead, use it as a learning experience for future trades.
Utilize risk management features
We have stated this previously in our article and we are saying it again: Use stop-loss orders.
It does not cost you any extra money and saves you from huge losses. Make sure to place a stop-loss order with your trades.
Take profits serves as a risk-management tool too but what it does it closes your trade when you have reached a certain profit-level.
Start with low leverage assets
Start your trading by choosing those assets which have a low leverage ratio.
Higher the leverage gets, the higher the profit or loss potential.
While higher profit does sound appealing, higher losses can destroy your account balance and make you quit trading altogether.
Trade with patience
Don’t try to get rich quick. Successful CFD trading is not a sprint; it is a marathon.
Aim for small consistent profits rather than trying to get large profits from a single trade.
Maintaining patience also ensures you are not emotionally involved in a trade.
Diversify your risks
There’s an old saying that goes like,
“Don’t put all your eggs in one basket”.
This applies in the case of trading CFDs too. If you concentrate all your savings on one asset, you have the possibility of losing it all together.
Diversify your trading portfolio to minimize risks. Trading multiple assets also enhances your trading skills and knowledge.
In this article, we learned about Contracts for Differences. They have been gaining immense popularity due to its leveraged nature.
Every day more and more traders are getting attracted to CFD trading and hence the demand for successful CFD trading tips or strategies has been increasing.
We listed the advantages, disadvantages and the procedure to trade CFDs.
We discussed the countries where CFDs are allowed and where they are banned.
Finally, we discussed the best CFD tips and strategies for beginners and advanced traders alike.
Apply these into your trading regimen and you will make CFD trading profitable in no time. We hope this article helped you with the information you were looking for.