CFD Trading

CFD Trading 

What is CFD Trading?

1cfd1CFDs (Contracts for Difference) are derivative trading mechanisms supplying investors with the opportunity to trade the price movements of numerous financial assets, such as commodity futures and equity indexes.

CFDs provide an easy to understand technique to invest in various markets without the need to own any share whatsoever in the underlying security upon which the contract is structured. Traders consider that CFDs offer a viable alternative enabling them to extend their trading into new horizons.

CFD Trading Guide:

What are CFDs?

CFDs are basically forms of agreements between two interested parties, which are the buyer and the seller. Essentially, you can utilize CFDs to profit from the price variance of an extensive range of assets diversified among the four main trading categories, which are currencies, indices, stocks and commodities.

For example, if price of a particular security is ascending within a well-defined bullish trend, then you could evaluate the validity of purchasing that asset by using a CFD. The primary intention of such a move would be that you could then sell the CFD at a later time after price has appreciated in value in order to record a profit.

How are CFDs created?

You can construct a CFD by basing it on an equity index which is a financial index representing a designated section of the global stock markets. For example, the major USA indices are the Dow Jones Industrial Average, the S&P 500 and the NASDAQ.

Consequently, envisage that you have detected that the NASDAQ has recently recorded a double bottom and is presently rebounding higher. You could now exploit this observation by purchasing the NASDAQ using a CFD. BY doing so, you should carefully note that you have bought no physical part of the NASDAQ whatsoever during this process. If price does proceed higher as you have forecasted then you could then cash in your CFD at a later date for a profit.

You can also base a CFD on a commodity future which is fundamentally an agreement to sell or purchase an agreed amount of a particular commodity, such as oil, corn, wheat or gold, etc. at a predefined date and price. By performing such an action, you will basically be speculating on a selected commodity because its price will oscillate over any given time period in compliance with its supply and demand.

Why use a CFD?

There are a number of advantages of using this investing mechanism as opposed to more traditional methods. The first one is that you do not need to own any part of the underlying asset whatsoever. In addition, when you trade using CFDs you will have access to an extensive leveraging facility. You will therefore be able to open a very large position by supporting it with just a small deposit.

For example, imagine that your CFD broker provides you with a leverage of 100:1. You could therefore execute a CFD based on gold, for example, by initiating a $100,000 position backed by just a $1,000 deposit of your own money. However, although leverage provides you with the opportunity to register greater profits it also increases the levels of risk substantially as well. As such, you are well-advised to master the concepts of money management as quickly as possible in order to optimize the protection for your account balance when trading CFDs.

There are many other exciting benefits about using CFDs to trade the financial markets. For instance, they allow you to profit from both rising and falling market conditions. In addition, any profits that you acquire from CFDs are also not subjected to Stamp Duty because you never physically own the underlying assets. Also, CFD brokers charge minimum fees and commissions for their services.

Making Quality CFD Decisions Consistently

To trade CFDs successfully, you need to develop a psychology that will allow you to consistently generate quality decisions for some considerable time. Acquiring this skill is very important because you must learn how to react swiftly and appropriately to all the new developments that the financial markets will constantly throw at you.

You simply do not have the luxury to permit your mindset to become swamped by any type of diversion. You must earnestly strive to prevent your gut feelings and emotions from influencing your trading decisions in any way whatsoever. In contrast, you need to develop a cold detachment from all of your surrounding stimuli when trading CFDs so that you can focus on trading in a professional manner. For example, you need to deploy good money management concepts so that you do not overtrade and expose your account to margin calls. By doing so, you can minimize your stress levels and trade with a calmer attitude. Consequently, you will be in a better position to be able to make quality decisions.

Otherwise, should you fail to introduce measures that are capable of neutralizing margin calls then you will be constantly worried about whether your open CFD trades are sustainable. Under such circumstances, you can become extremely agitated and distracted because margin calls are distressing events that can cause significant psychological trauma.

Consequently, you will experience great difficulty in maintaining a high standard of quality trading decisions. In addition, you will also have to contend with making rapid judgments in response to all financial and economic global developments. As such, you can begin to appreciate that trading CFD is an activity that requires skill and experience in order to succeed.



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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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