Introduction To CFD Trading

What is CFD trading? A contract for difference (CFD) is a common form of derivative trading. It involves an agreement between people to buy a contract in order to exchange the price difference from the opening to the closing position of the contract, without consideration of the asset's underlying value.

CFD trading is one of the best ways to earn profits as it enables you to hypothesize the falling or rising prices of financial instruments (commodities, currencies, indices, treasuries, shares). Today, Investors and traders have easy accessibility to CFD’s, meaning that there is necessarily no need to trade through a stockbroker.

Cfd’s enable you to trade on a margin, thus boosts your ROI (Return on Investment). You do not have to invest with the full amount of the shares you trade but instead part with a deposit to cater for any possible loss on the position. With the intricacy of CFD trading, it is crucial to have a deeper understanding of what it entails before starting out.

Below are a few steps to guide through Contract of Difference (CFD) trading;

1. Choose a financial market

Being spoilt for choice, find a market that is best fit for you. It is essential for you to identify a specific market including indices, currencies, bonds, interest rates, shares and commodities. Also choose instruments such as UK100 , EUR/USD that you want to trade on.

2. Decide to buy(go long) or sell (go short)

After choosing a CFD market, you need to find out its current price. The market has two distinct prices which are the bid( selling price ) and the offer( buying price). If you think that the price will increase in value buy, but if you think the price will decrease in value then sell.

3. Choose your trade size

CFD trading being a leveraged product, it means that you only need a small percentage of the full value to commence the trade . Carefully analyse and decide on the number of CFD’s you want to trade. The value of 1 CFD can vary Depending on the instrument you choose to trade with.

4. Risk Management

Every investment comes with a risk with it. What is your risk management strategy? Once you open your trade, it is essential to choose a stop loss order. A stop loss order is an instruction that allows you to close out your position if it reaches a given price. This will enable you to minimise the losses that may come from the trading’s that you undertake.

5. Monitor and Evaluate your position

With the fluctuating trade markets, it is vital to track market prices to see your CFD profits or losses in real time on various platforms. Additionally, you can add new trades after proper analyzation of your current position.

6. Close your position

After adequate evaluation of your CFD tradings, you can close of your trade when you are ready if your stop orders did not automatically do it.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.