CFD trading is challenging to new forex traders as it has some complexities that are hard to understand. However, once you learn how to trade it probably with the help of a brokerage firm, you realize thaqt it is one of the simplest and user-friendly trades for currencies and other markets.
CFD, which stands for contract for difference, is a trading strategy that involves entering into a contract between a trader and a broker. Unlike other trading assets, CFD is a derivative and derives value from an underlying asset’s movement. In CFD trading contract, the trader is the buyer and the broker is the seller, and both agree on the asset price depending on the market conditions.
Furthermore, traders can open trading positions without owning the underlying asset, which saves them from paying any costs, such as fees and commissions. Calculation of profit and loss comes from the price difference from the opening and closing positions. What this means is that the seller or broker pays the buyer, or trader the difference between the opening and closing position. CFD trading is available in a wide range of markets that include indices, shares, stocks, forex, and commodities, among others.
How Do You Trade CFDs?
CFD trading is a simple process especially if you have a broker to guide you. After opening a trading account, the next step is to select your trading instrument and you are good to start. If you are not confident about how the process works, you can always ask your broker to provide you with a Demo account to familiarize yourself with your chosen trading instrument before entering into the live markets. Below is the CFD trading process.
1. Select your trading instrument
CFD trading is versatile and allows you to trade different markets. You can choose index CFDs, forex CFDs, commodity CFDs, or share CFDs, among several others. Choose an underlying asset that you can trade with confidence. If you have problems choosing the right one, check the latest market, analysis reports to discover the ones hitting the markets positively. Alternatively, you can ask your broker to help in making the right decision because they have a better knowledge on the market behavior of different assets and leverage specifics.
2. Select your position
After choosing your instrument, the next step of the process is to choose your trading position. For example, you can buy or open a long trading position if you think your asset price will go up. Alternatively, you can sell or open a short position if you think the price will decline. You can use any available wide range of charts, signals, and indicators to help in determining the type of trade you want to open.
The position you want to open should also be a certain size, which should vet e next thing to do in your selection process. Of course, CFD unit value will depend largely on your chosen instrument. Begin by calculating the CFD unit numbers that will work perfectly with your chosen trading strategies.
3. Choose your trading platform
CFD trading is flexible and you can use some of the most popular trading platforms for your trades. The platforms that include MetaTrader 4 and MetaTrader 5 have a wide range of charting tools and technical indicators and all the other tools you need for successful CFD trading. You can also keep track of your profits and losses in real-time by trading CFD on mobile apps.
4. Consider the CFD leverage and margin
One of the main advantages of trading CFDs is you can open a position by depositing a small percentage of the trade value for potential profits. Leverage with CFD trading is higher than with other traditional trading markets. You should also remember that leverage could also give you losses as it does profits. A leverage and margin calculator will help you to trade wisely.
CFD trading allows you to take positions across a variety of markets. The relative performance of the assets in CFD trading is attractive which it is popular among many traders. It is also available in large trading platforms that provide you with the best trading indicator and charting tools for the process.
Even better, CFD is versatile and you can opt to trade on the go using your mobile phone. The trading process is simple to grasp but you have to remember that the markets are unpredictable, so every day is a learning curve.