As its popularity grew, CFD are used to trade different kinds of markets including but not limited to energies, commodities and indices. In participating in this form of trading, you focus on two different aspects: the buy and the sell price. By focusing on the spread, the difference between the buy and sell price, you aim to profit by trading at the buy price which will enable you to profit as the market value increases. By trading at the sell price, you will profit if the asset’s value decreases. Let’s find out what are the things you need to know about CFDs
What is CFD?
CFD, which stands for Contracts for difference, are a form of financial CFD trading that allows the trader to transact based on speculated movements in the financial markets. Traders may focus on different markets such as commodities, indices, or oil, without owning. Transactions are made by opening a contract with a broker for trading CFDs. The price difference calculated from the profit and loss in different markets based on the time you have opened a position up until you closed.
Go short or Go long?
Unlike in traditional investments, CFD allows traders to profit based on the rise and fall movements of the price given that you do not own the underlying market. In other forms of trading, you can’t sell a share that you have not bought before. You might choose to purchase an asset if you expect the prices to rise in value , this is called Going long and it also you can then sell at a later date, for a higher amount. Going short, on the other hand, is the sale of an asset which you do not need to actually own. Choose to do this if you think the value of the stock will go down.
What is leverage?
The opportunity to trade CFD based on margin is called Leverage.Profits are calculated on the position for both losses and gains of the market, a unique aspect of CFD and may be a double edged sword for the trader. Most traders are very cautious when trading CFD given there is high volatility involved.
Another way to trade CFD by Hedging. A trader hedges one investment by making another to insure an open position. This is done by most traders as a strategy to counter the adverse price movements in a volatile market.
For example, if you find a share you bought is in the red and its profits and loss continue to push lower, you may open a short CFD position on the share and limit your losses.
Get Flexible Contract Sizes
As you start with CFDs, it is wise to select a broker who offers different contract sizes. As you find a broker that offers such will help you “break in” and gradually trade with smaller contracts first up until you work your way to trading larger contracts. It is important to understand that structuring your plans according to your risk profile enables you for a long-term profitability in trading. You get to learn and earn as you go along