CFDs are among the most profitable financial instruments for investors today. Find out how CFD trading works.
CFD trading has increasingly gained popularity as a less capital-intensive but profitable investment, attracting institutional investors and individual traders worldwide. It comes with numerous benefits, such as making money in both rising and declining markets. Besides, traders only need to invest a small portion of their entire portfolios’ value, minimizing your risk exposure significantly.
Contracts for Difference (CFDs) are derivatives traded today, including forex markets and crypto exchange platforms. Unlike other forms of trading, CFD traders deal with the prices derived from the underlying markets or assets. That means you do not own the actual underlying assets, instead, use them as leverage.
Traders can use CFDs to buy and sell a wide range of financial instruments, including forex, indices, stocks, shares, commodities, and cryptocurrencies. CFD trading mainly involves betting on whether the value of a particular asset or market will increase or decrease. However, everything is not always in black and white.
The Essentials of CFD Trading
Trading CFDs offers more significant potential for substantial returns on even small investments, but success is not always guaranteed. The first step to successful CFD trading is understanding the basics of margin, position size, opening and closing price, and order types. You will learn a lot more as you trade.
The margin is the deposit that you put down when opening a position. Most CFD brokerage platforms like Bitcoin-Prime allow traders to deposit just a fraction of their entire trade’s value to open a trade position. Besides, many platforms will also allow you to trade 24 hours a day, increasing your chances of making substantial returns.
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Position size is the total value of the investment, including the deposit and expected returns. You open a position when you begin trading and close or exit when you discontinue. CFD trading is quite flexible since you can always open and close positions as you wish, based on the market condition and investment goals.
Order types are instructions or strategies for risk management that help traders protect their portfolios from extreme losses and maximize returns. Stop-loss and take-profits orders are the most common order types that will allow you to set specific loss and profit parameters when trading CFDs.
Steps for Trading CFDs
Choosing a Market
You can trade CFDs on various financial markets, including shares, indices, commodities, bonds, cryptocurrencies, and forex. However, it is unrealistic and cumbersome to get involved with all those instruments or markets. Thus, traders should first decide on one or two CFD markets on which to focus. The choice should mainly depend on your investment goals and preferred trading strategy.
Deciding to Go Long (Buy) or Go Short (Sell)
Your next step after choosing the market is determining the current price. Any CFD’s price depends on the price of the underlying instrument. The first price on the trading ticket is the selling price or the bid, while the second one is the buy price or the offer. Buy or go long when the markets might increase and sell or go short, the markets may experience turmoil.
Selecting a Trade Size
CFD trading allows traders to choose the number of CFDs they wish to trade. 1 CFD is usually equivalent to 1 share in equity trades. However, the values vary when trading indices, commodities, bonds, and FX.
Setting a Stop-Loss Order and Monitoring Trades
A stop-loss order closes your positions at a specific level if the market prices move too far against your bet. Your profit/ loss updates will show in real-time once you place a trade, allowing you to exit if things go wrong.
Overall, CFD trading is a cost-effective and straightforward way to make money. However, understand the underlying risks before investing.