Introduction to CFD or Contract for Difference Trading
One of the most popular derivative trading is contract for difference trading or CFD for short. Primarily, to earn in this type of trading, you need to guess the movement of the underlying asset and its price difference once and after a trade is done.
For those who are unfamiliar with derivative trading, it is a type of financial trading that is done outside of a real market but uses all data or assets in that same market. Those assets that are used or referenced in derivative trading are called underlying assets.
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What Is CFD trading?
To be precise on what trading CFDs is, you mainly profit by speculating the falling and rising of the underlying asset that you wish to trade in. One of the biggest advantage in CFD trading is that you will have access to multiple types of assets and markets.
For example, you can choose to “trade” stocks or currencies. The range of assets and markets available to you in trading CFDs depends on the broker that you will work or sign up with. Other assets that are usually included in contract for difference trading are credit, options, swaps, forward contracts, and future contracts.
Since CFD trading is a derivative trading, remember that you are not actually trading anything tangible. It means that when you work with stocks, you are not buying or selling anything. You are not also trading in the real market. You are only directly trading or speculating against your broker.
To further understand this type of trading, contract for difference is a contract or financial instrument that reflects the difference between the value of an assets when the trade is started and ended. It is an agreement wherein if you predicted the movement of an asset correctly, the price difference of the entry price and exit price will be rewarded to you by the broker.
For example, if you buy assets or go long, you are considered the buyer. If you predict correctly, the seller will pay you. And if the result of the difference is opposite of what you predicted, you, as the buyer, will provide the payment to the seller. In this type of trading, the broker is usually the one trading against you. If you buy, the broker sells. And if you sell, the broker buys.
By the way, there are two main trading actions you can do in trading CFDs. The first one is buying or going long. This is used when you feel that the market will rise. The second one is selling or going short. This is used if the market will fall.
The amount you need to use to enter a trade depends on the price of the asset and the broker. However, unlike regular trading, CFD trading brokers provide huge leverages and margins to its clients. CFD brokers often provide 2% up to 20% margin.
For example, if the asset is priced $100.00 per unit, it means that you can enter a trade on that asset by only investing $2.00 up to $20.00 per unit. The leverage has both its advantage and disadvantages. The primary advantage is that trading CFDs does not require high amounts of money. However, the disadvantage is that returns will be small.
The disadvantage can be turned around by getting more units of the assets or investing bigger, but keep in mind that the bigger investment you use, the losses are also magnified.
First, CFD trading is now popular is because of its accessibility. With little investment required, almost anybody with spare cash can trade CFDs. Another reason this type of trade is accessible is because most online brokers offer trading CFDs.
Most brokers have small initial deposit requirement for their clients to gain access to the trading. Usually, it is around $100 to $200. For those who have a decent amount of capital, brokers often provide additional features to them. Usually, brokers provide those features when a client’s initial deposit or current investment money is around $10,000 or more.
Second, CFD trading exposes you to multiple markets. As mentioned, CFD can be traded over multiple underlying assets and markets. This allow traders to see and become more familiar with every market available from a broker. For example, if you want to familiarize yourself with stocks and currencies but do not want to trade in real markets yet, you can start with trading CFDs.
There are two main factors that will affect the safeness and risks involved in CFD trading.
First, just like with any type of investment and trading, the safeness of trading CFDs depends on your strategies and knowledge. If you trade big, the amount of money you could lose will easily become big, too. If you do not have any idea on what you are doing, consider that your money will just go down the drain.
Second, another risk factor that makes CFD trading seems unsafe is the brokers. Because of its rising popularity and ease of access, many malicious individuals and entities take advantage and swindle people. For example, a devious online broker may accept deposit and let clients trade. But if they try to withdraw their money, the devious broker may not give anything.
When to Trade with CFDs?
Now is the best time to be involved with CFD. One of the biggest reasons you should trade now is the stability of the markets. The more stable the market is, the more predictable its movements will be. And when if you can predict the market, the higher the chance you can earn with derivative trading like this one.
If you want to have a better chance with CFD, it is highly suggested that you start with stocks. In 2017, the stock market reached an all time high — a feat that has not been achieved for a half century. According to experts, this trend will continue for the next few years.
Commodities are also experiencing a positive trend. Oil, gas, and energy are particularly going strong and is predicted to be stable for the next few years. Technology and application development industry stocks are also estimated to follow the same trend, too.
If you prefer volatile markets, most brokers include cryptocurrencies in their CFD trading platforms. Cryptocurrencies are volatile financial instruments that are considered high risk instruments by financial authorities like FCA (Financial Conduct Authority) and ESMA (European Securities and Market Authority).
Another reason you want to do trading CFDs is the ease of signing up with a reputable broker. This site contains a list of the most popular and trustworthy brokers in the web. It means that you can be rest assured that you will not be swindled.
Also, thanks to the reviews in this site, you will be able to pair up with the best and most compatible broker. Aside from getting the right broker for you, you can easily transition from a complete trading noob to an experienced vet in no time with the help of the broker you choose.
Most of the brokers listed in this site provide helpful seminars, guides, and tutorials to assure that the clients they will get will profit and stay on the business long. And you can take advantage of those rewards by just signing up, which only takes a few minutes and clicks.
CFD Trading Explained
The first step is to find the broker you will sign up with. As mentioned, you can find a broker of your preference in this website. Signing up with any one of them is a fast process. To get an account, they only require a Facebook or Google account. If you do not have any of those two or you do not want to use them, you can just use your email address and your name.
After providing those, you will be immediately considered a client. You can access some of the features that a broker offers. However, if you want to start trading, you will need to provide an initial deposit. The amount depends on the broker, and usually, it only amounts to $100 to $200.
On a different note, some brokers provide demo accounts. Demo accounts can be used to trade without using any real money. Of course, you will not profit from this type of account. Demo accounts are there just for you to get a hang of a broker’s platform and practice strategies that you want to employ on a real account.
Usually, a broker’s platform can be accessed or used in three ways. The first method is to access the broker’s website and use its online platform. The second method is to download its platform’s program that you can install in your computer. The third method is to use your smartphone or device to get the platform’s app.
Say that you already have an account. To start trading, you must be familiar with three things: how to choose the market and asset, how to read charts, and how to navigate to the trading function.
The assets and markets available to your disposal depends on what the broker offers. Usually, it is presented as a list.
Once you selected an asset or market, most platforms will show its up to date chart. There are three types of charts used in trading: line, bar, and candlestick. Most platforms will provide you with an option to toggle the type of chart it will display.
By observing the chart, you will see that the it will update every second and go up and down erratically. At this point, you will analyze its behavior and pattern. In predicting movements of financial instruments, chart patterns are relied on.
A common chart pattern/strategy traders use is the double top. If the asset peak two times in a row, the possibility of the asset experiencing a massive fall will be high. If the market or asset shows that it does indeed following such pattern, you can choose a short or sell option to profit when the asset finishes peaking twice.
What’s the Best CFD Broker?
It is quite true that multiple CFD trading scammers are on the loose on the web. That is why sites like this exist to help aspiring CFD traders to find a broker that will not run away with their money.
The difference between this site and other broker listing site is that it hosts authentic and real broker reviews. The brokers listed in this site has screened the best from the bunch. And the site provides all the information you need to find the best broker that will be compatible with your trading needs.
Also, note that most of the brokers here are licensed and regulated by EU financial authorities. The biggest advantage of EU based brokers is that safety is their biggest priority. In addition, being based on EU allows their clients to be capable of trading in EU markets as if they are citizens.
Finding the best broker is a subjective journey. This sounds cliché, but every person has different needs and no broker can provide the solution to those need. Despite being a subjective process, you can be partly objective in finding the right broker for you.
Few of the considerations you must include in your search are: required minimum deposits, range of underlying assets, bonus features, demo accounts, trading platform, accessibility, customer service, customer education, and trading types offered.
For beginners, it is crucial for you to focus on demo accounts, required minimum deposits, customer education, and accessibility. As a new trader, it is crucial for you to minimize your risk, obtain as much information as you can, and learn the platform you are using fast.
For experienced traders, you know that your primary considerations are range of underlying assets, bonus features, customer service, trading platform, and trading types. You already know how to “play” the game. The broker you need is one that can accommodate your expertise and provide you more options.
Do note that finding the best broker does not mean signing up to only one. There is no hard rule on sticking to only one broker. You can sign up to multiple ones whenever you want. It is a good practice to sign up with multiple brokers since it will allow you to intimately know which one will work best with you.
Benefits of CFD trading
It has been mentioned here multiple times that the biggest benefit of CFD trading is its accessibility. With a small capital, an internet connection, and a bit time for studying the market and contract for differences, you can immediately start trading.
Aside from that, trading CFDs is flexible. It does not matter if you want to treat it as a hobby or your primary income source. You will still profit as long as you never forget how to manage your risks and be aware of the markets’ movements.
In addition, CFD trading is an excellent way to enter the trading industry. With most broker platforms exposing you to almost all markets available in the world, you will have a closer look on what happens in exchanges and trades. You will have a better idea on the things you need to do for you to profit from trades without losing too much.
How to Start with CFD trading?
Most expert traders recommend that you start learning the basics first for six months. Despite being a derivative type of trading, the money you will use in trading CFDs is real. Consecutive mistakes and decisions can easily cost you a lot.
As recommend, the first thing you need to do is to secure a proper broker. You can also start reading the educational materials on this site before you sign up. But if you do prioritize signing up first, take advantage of the videos and text tutorials that the broker you chose offer.
Also, be sure to start with a demo account. A demo account can help you figure out how CFD works. In addition, it is a perfect practice ground. Most demo accounts will allow you to play with a virtual capital of $10,000. That amount is enough for you to take experiment and learn the optimal way to use your money in this kind of trade.
As another tip, be sure to become more aware or up to date with news related to the assets you are monitoring and the financial and trading industries. Being knowledgeable on those areas will allow you to gain more insight on how you will play your cards right when predicting outcomes when trading CFDs.
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