A Contract for Difference (CFD) trading is a form of a contract agreed between an investor and a bank to exchange the profit between starting and final prices of a financial instrument. Basically, a CFD contract is a financial instrument which enables traders to invest in an asset they do not own.
Similar to Forex, CFD trading is based on the difference between the price at the start and the end of a trade. You can either decide to sell or to buy at a given price which will then determine your profit or loss when the trade is closed.
There are many things a beginner needs to consider when starting CFD trading for the first time. In this article, we provide you with five things that you need to know about CFD trading.
It’s All About the Profit
Unlike trading in stocks, CFD trading lets you profit from both upward and downward market trends. Your main aim is to predict the way in which the market will go and then buy or sell according to your prediction.
Again, like Forex, CFD is based on leverage which means there’s potential for great profit in a relatively short time, but it also means that the risks are higher.
Risk Management is the Key
Once you decide to enter a trade you will have to determine how many units it’s best to trade. If you are new to cfd trading, you should be extra careful at managing the risk and from this reason we recommend you start trading in small amounts in order to learn how the system works.
Tip: In case you have no previous experience, it’s best you start by opening a free demo account which lets you try out CFD trading with virtual funds and free of any risk.
Know the Market
Any serious CFD trading should rely on knowledge of current market trends.
Even if you are completely new to CFD trading, you should be ready to start by exploring the basic information about the market which will enable you to have a basic overview of the risks involved.
Having the right knowledge is the key to success so make sure you familiarize yourself with how CFD trading works before you start.
The Market Can Be Volatile
High volatility is one of the underlying attributes of the global financial markets which has a direct influence on your trade. Even the experts are unable to predict the way markets will respond to certain events and this is just one more reason why you should be extra careful when trading in CFD instruments.
Tip: Always select one type of stop-loss order before you enter a trade.
You Lose More Than You Deposit
As we mentioned in the introduction, leverage creates opportunities for greater profits but also leaves the potential for losses at the same time.
A losing trade may result in losses and your losses may even exceed your deposit. Make sure you manage the risk carefully and stop losses when the trade is not going in your favor.