Trading CFDs are very popular among new and budding traders because it is cost-efficient, allowing you to trade large positions just by paying a small percentage of the overall market price of the underlying asset. You also do not own the underlying asset, instead, the losing party (either the broker or the trader) will pay the difference between the opening and the closing price.
What does CFD really mean?
CFD short for Contract for Difference is described as a tradable contract that involves a broker and a client. They will exchange the difference of the value of the currency, index, share, or commodity at the end of the trading position. Over the years, Contract for Difference has been relatively appreciated by traders mainly for their series of advantages.
The Leverage Keeps The Game Going
CFD is a leveraged product, one of the main reasons for its popularity. It allows you to utilize margin trading which is very helpful in increasing the trader’s exposure to the market. Margin trading is referred to as the collateral that the trader has to pay when opening a trading position.
Since you will be paying a small amount as a margin, you can use your remaining funds for trading in opening other positions in the market. The results of leverage are amplified market movements no matter if the price goes up or it goes down. Leverage may increase your profits but it also has the capability to increase your chances of acquiring losses. To keep your account safe from bankruptcy, you must be sure to employ profound money management rules.
Knowing the Three Best Strategies in CFD Trading
Most CFD traders would practically use trading strategies like scalping, intra-day, and day trading because these strategies let you keep up with your positions overnight without additional fees. But these strategies need a lot of your time, focus, and dedication if you are determined to outperform the market. As for day trading and intraday strategies, traders open and close their trading positions within a day.
Scalping is a strategy that works best with CFD. It has higher flexibility with low transaction costs. Scalping is great for trading the news. This strategy allows you to take advantage of every small profit available every few seconds or minutes.
CFDs on stocks usually use pair trading but you can also use it on commodities, ETFs, and currencies. The main advantage of pair trading is that it can be utilized during low or high market volatility. This strategy pays no importance to the market’s direction.
Most of the time, hedging is being compared to insurance. For example, if you secure a car insurance policy for accidents or any other negative things that might happen to your car, the bad consequences are largely reduced. Hedging is also being used in finance and it completely negates the risks associated with the investment. Big banks, hedge funds, and other similar investments all use hedging. This is to provide protection for their investments.