CFD simply stands for contract for difference and can be defined as an agreement between a trader and a broker in relation to either upward or downward change in the price of a given asset.
Unlike shares trading described by ForexTime, while trading CFDs, traders do not hold any possession of the trading asset be it shares, cryptocurrency or foreign exchange.
It is a trading option that involves predicting and speculating the direction of the price movement of any underlying asset. The trader will place their finance on stocks against speculation that the price of a particular asset will either rise or drop and the contract defines an amount to be paid to the traders against market fluctuations.
The fluctuations are measured in spreads, which is the difference between the buy and sell price. The trader backs their judgment on whether the value of the asset will rise or fall to receive a payoff if their judgment is true and a loss if the judgment is false.
Here are 6 Tips for CFD Traders
CFD trading is one of the investments that allow the trader to minimize risk and still earn some returns. It can lose or gain money by the minute and requires patience and a lot of real-time accurate data analysis. Below are the tips that will help beginners get better returns.
1. Stick to a Strategy
When going into CFD trading, one needs to select a good strategy and stick to it. At times, the asset values may move in opposite directions due to the volatility of the market. But sticking to strategy ensures less panic and more patience when this happens.
2. Be Always on Alert
Online trading comes with its fine share of fraudsters. Always being on a healthy alert level ensures wise decisions. Beginners need to be keen on the brokers who are trusted and safe to work with and not rush to every good return promise.
3. Preserve CFD Trading Capital
When the speculations are good and returns are lucrative, there is a temptation to abandon strategy and put in all the finances. This is not wise as you may lose much or miss out on a better and lower risk opportunity. As a beginner, one needs to know how to preserve capital for more diversified CFD trades, thus, reducing risk and increasing chances of good returns.
4. Controlling CFD Leverage
Leverage can be a powerful temptation to trade when one’s trading is going well. It’s important to always remember the possibility of loss to make wise choices.
5. Trading Plan
One of the most common mistakes that beginners make is that they start trading because they have heard of a friend who has made money from Forex trading. It’s always important to come up with a trading plan before one starts to trade, regardless of their reasons to join the market.
Which Assets Are Available for CFD Trading?
Beginners are most times faced with questions of what assets to focus on when they decide to venture in CFD trading.
- Government bonds in different countries including Nigeria and South Africa among others;
- Public listed company shares such as Apple or Unilever;
- Cryptocurrencies such as Bitcoins, Ethereum, Ripple or Letecoin;
- Foreign exchange markets such as EUR/USD currency pair;
- Commodity markets such as oil, gold, and precious metals.
Many traders will opt for CFD traders because most brokers will trade with the minimum financial requirements. Traders and brokers like this trade as they do not have to own any asset or gain any physical possession of a trading asset, they can gain some return and move forward to trade the same in another opportunity.
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