A guide to trading CFDs

Australia remains one the largest markets for CFD trading globally, on a per-capita basis. This is because trading CFDs allows people to speculate on shares, cryptos, forex, indices, commodities, and more. In this article, we take a look at what CFDs are, and how to start trading CFDs. Read below to learn more.

What are CFDs?

A contract for difference (CFD) is a specific type of leveraged derivative instrument that allows traders to speculate on the changing prices of a particular underlying asset. Traders do not need to own said underlying asset. Essentially, it is a contract between a buyer and a seller that necessitates the buyer to pay the seller the difference between the current value of an asset and its value at closing time. Traders can potentially find opportunities with CFDs by correctly anticipating the change in the financial asset’s value. These assets include currencies, shares, ETFs, commodities, bonds, cryptocurrencies, and indices.

The value of a CFD does not consider the underlying asset’s value, but only the price change between its opening and closing. Currently, trading CFDs is becoming popular, with quite a few brokerage firms offering this option to traders looking for something different.

How to trade CFDs

Trading CFDs is considered a flexible way to speculate on the price movements of various financial instruments, without needing to own the underlying asset. CFD trading, therefore, allows traders to potentially profit from both rising and falling markets. Below, we have broken down and explained how to get started with trading CFD.

Educate yourself about CFDs

CFD trading works by using contracts that mimic how real financial markets function. Traders will buy and sell these contracts in the same way they would buy and sell the underlying asset. Instead of deciding how much of a particular asset a trader would like to invest in, a trader will simply pick how many contracts to buy and sell.

This means if the market winds up moving in a favourable direction, a trader will be likely to earn a profit. However, if the market moves in an unfavourable direction, the trader will likely incur a loss instead.

Choose a reputable brokerage firm

Traders need to pick a reliable and regulated CFD broker before they can start trading CFDs. This is because a broker gives traders access to financial instruments and markets. Traders should look for brokers that provide a user-friendly platform for their clients, competitive spreads, and robust risk management features. As no two brokers are the same, it is important that traders do their due diligence before committing to a particular brokerage firm, as a broker can significantly impact their trading journey.

Create a trading account

The next thing a trader needs to do is open a live trading account with the broker of their choice. It is important to remember that the account registration process typically requires some documentation and personal information that may involve identity verification. This may include handing in documents pertaining to one’s personal identity (passport, government-issued identity cards) and proof of residence (utility bills), as well as a Tax Identification Number (TIN). Of course, each brokerage firm will have its own specific account registration process, so it is always good to take a look at their instructions first.

Fund the trading account

Traders then need to find some way to fund their trading account. This is usually done through the payment methods offered by the brokerage firm. As such, this can include methods like wire/bank transfer, credit cards, as well as digital wallets such as Samsung and Apple Pay, and more. As always, make sure to double-check what payment methods are allowed by the broker before committing to a brokerage firm. Also, traders should ensure they have sufficient capital to cover potential losses and margin requirements.

Pick a market

One major advantage of trading with CFDs is the huge range of financial markets that traders can choose from. These include individual markets across shares, currencies, commodities, indices, bonds, interest rates, and more. With so many choices it is therefore important that traders find an opportunity that suits their needs. Fortunately, most brokerage firms provide plenty of research tools to allow clients to help them pick a suitable market. Once a trader has chosen a market, they should double-check its live price. They also have the option of looking at a chart and any other information needed before finally taking their position.

Select a CFD trading strategy

When it comes to trading CFDs, there are plenty of strategies to choose from. Therefore, it is essential traders set out some guidelines for what and when they will trade. The aim of most strategies is to find the most advantageous entry and exit points so that the trader will be likely to achieve consistent returns over a long period of time. Some strategies include range trading, hedging, support and resistance trading, breakout trading, and more. Traders should also conduct market analysis to identify potential trading opportunities. These include technical analysis, fundamental analysis, or a combination of both, to make informed financial decisions.

Place trades

When a trader has created a well-defined trading plan that includes their entry and exit points, stop-loss levels, and profit targets, only then can they finally place their trades. It is best that traders stick to their trading plan to avoid emotional decision-making when it comes to placing trades.

Monitor and manage trades

After placing a trade, traders should make sure they continue to monitor and keep a close eye on any open positions. As such, they should be prepared to adjust their stop-loss levels or close trades based on market conditions or their trading plan.

Practice with a demo account if needed

If a trader is unfamiliar with CFD trading and needs more practice before live trading, they can always practice with a demo account if needed. Fortunately, most brokerage firms provide demo accounts to traders, and they are often free – so long as the trader registers an account with the broker. Demo accounts provide traders with virtual funds so they can trade in a simulated environment, meaning they are entirely risk-free. This makes them a great way for traders to practice trading strategies and get comfortable with using the trading platform’s interface before putting their funds on the line.

Bottom line

Overall, it is important for traders to remember that CFD trading comes with risks, including the possibility of losing more than their initial investment. Therefore, it is vital traders approach CFD trading with discipline, proper risk management, and a sound trading plan. As with any form of financial trading, it is important traders never invest more than they can afford to lose. If you are new to CFD trading, you should consider starting with small trade sizes and gradually building your expertise and confidence.

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