A contract for difference (CFD) is a novel way of trading that allows you to trade in a financial instrument without actually owning the underlying asset. With CFDs, you can speculate on the prices of volatile financial markets worldwide such as indices, treasuries, commodities, currencies, and shares at a fraction of their actual cost.
To trade in a CFD online, you will need to get into an agreement with your broker to exchange the price difference of an asset from the opening of the CFD to its closure. With CFDs, you can speculate on rising and falling markets as well. Your profits or losses are dependent on your forecasting prowess.
Steps to trading a CFD online
- Choose your market.With thousands of trading instruments available, the choices globally will wow you. Use your research skills via your trading platform to choose assets that best suit your trading capabilities. Once you have settled on your asset of choice, research on its current value. Your platform should show you both the bid price and buy price. The difference between those two prices is known as the spread. This is where your profit lies. You can choose to go long on the asset if you speculate that the prices will rise. You can also go short, or sell if you believe that the prices will fall.
- Decide on the number of CFDs you are willing to trade in. With CFDs being highly leveraged products, your small percentage of trading instruments can reap you massive profits. If you pick on larger trading volumes, you will require more funds to trade and vice versa. Beginners are advised to trade with low margins to avoid massive losses.
- Always add stop loss and limit orders to your trades. Before trading your CFD online ensure that you have covered the basics by taking time to learn how to trade. Part of this learning involves coming up with a trading and a risk management strategy as well. Stop loss orders are an essential part of this risk management strategy. This order ensures that your trade automatically closes once the market you are in hits a certain point. This point is set by you the investor to ensure that your position is closed to stop losing trades, minimizing losses. Limit orders, on the other hand, will close your trade once the market hits a point that’s better than the current level. This ensures that your profits are locked in case the market’s direction changes. As the market looks to continue to be volatile in early 2019 if not beyond, these options can protect your assets.
- Keep an eye on your trades and close when ready. Track your trades on your online CFD platform in real time and take necessary measures to open or close your trades as needed. When it is time to settle your trades, all you need to do is choose the ‘close position’ on your app or platform. Your profits or losses will then reflect on your platform’s account cash balance.
The final word
While trading CFD online can be very profitable, it is also a high-risk trade. Observe the markets and get expert knowledge on trading in these highly volatile investment instruments.
Photo Credit: stock photo