CFD stands for contract for difference, and CFD trading is a form of online trading which allows the trader to invest in an asset without ever owning it. It is essentially a contract between buyer and seller, which states that seller will pay the buyer the difference (and vice versa if the difference is negative) between an asset’s current value compared to its value at the time the contract is made. Here are some of the things to consider when approaching CFDs.
Leverage
Leverage is undoubtedly one of the factors which makes trading CFDs popular, as it allows the trader to control a much higher quantity of any given asset for a fraction of the price it would cost when buying it outright (depending on the level of leverage).
This allows for potentially greater profits if investments are successful. It does, however, also allow for greater losses, making it very much a double-edged sword. Using too much leverage has often proved to be a fatal mistake for many traders, who can see their entire portfolio wiped out with one or two over leveraged trades. In this sense, it is best to keep leverage at a sensible level.
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Stop Losses
The ability to provide stop loss orders on investments means that those trading CFDs can reduce risk and ensure that they do not lose too much on each individual trade. Stop losses involve setting a price at which your trade will be automatically closed if the market moved against you.
This helps to bypass the risk of making enormous losses from a single trade, and helps the trader take control of their investment. The main advantage of this is that it is automatic, so the trader needn’t be watching the market at the time the trade is taking place.
Strategy
Being successful with CFD trading very much depends on the trader’s mindset and how responsible they are with their money for investment. As previously mentioned, they have the ability to bring in both significant profits as well huge losses.
This means that trading CFDs is only worthwhile if an effective and well researched strategy is applied to each and every trade. The strategy will need to take into account the risks of CFD trading and serve to minimise these based on the trader’s budget.
Ultimately, CFD trading can certainly be a worthwhile venture to the right person, but it requires good discipline and experience of the markets. Those considering it as a form of investment should take plenty of time to research further and develop a solid strategy which maximises chances of long term success.
