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CFD Trading: Learning to Trade Profitably during Market Volatility

CFD trading has taken the online financial market trading world by storm. It has become one of the most popular trading instruments available to trade on. However, it is not an easy financial trading instrument to master.

Also, the reality is that CFD trading is a high-risk activity, and it should be undertaken with foresight, knowledge, and a keen understanding of the strategies, tools, and techniques used to mitigate the exposure to risk. Additionally, you must only trade with funds that you can afford to lose.

On the other hand, this does not mean that you should avoid utilising the CFD trading instrument to drive trading profitability. All it means is that you should make sure that you know how to trade on CFDs before you open any trading positions.

CFD trading: A succinct definition

Before we look at some tips to help you trade profitability irrespective of the current market conditions, let’s look at what a Contract for Difference (CFD) is:

lexicon.ft.com CFD as "a contract between an investor and an investment bank... At the end of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument."

As a trader, trading on CFDs allows you to use leverage and margin to trade on more significant asset volumes than otherwise would be possible should you use the funds in your trading account to buy and sell the asset linked to the CFD.

What is margin, and what is leverage?

In summary, a CFD’s sole aim is to facilitate the trading of larger asset volumes that would be the case if you only use your trading funds to buy and sell financial market assets. Thus, margin is the deposit and a specified percentage of the overall trades value. The broker takes this amount from your trading account and uses it to secure the trade. Leverage, on the other hand, is the amount that you borrow from the broker to trade on to increase your trades profitability.

Tips to improve trading profitability during periods of market instability

Now that we have a comprehensive understanding of a CFD, and how it allows traders to maximise profitability by borrowing money from the broker, here are two most important tips to improve the odds of trading successfully:

Knowledge

As mentioned above, it is critical that you have a comprehensive understanding of to set a CFD trade before you open a trading position on your broker's live trading platform. To this end, a good broker will have an education centre as part of their offering that will include CFD eBooks and CFD trading courses. It is essential to work through this material and to ensure that you understand it before you start trading on CFDs.

Investment strategy

It is equally important to plan your trading strategy before you open a trading position. It is important to remember that CFDs allow you to trade on a linked asset's price movements. You are not buying or selling the asset itself. And, the greater the market volatility, the higher an asset’s price fluctuations.

Planning your trading strategy will include aspects like determining entry and exit points as well as setting stop-loss and take-profit values. Realistically, your first step is to decide whether the underlying asset's price will move up or down and to what extent. Analytical tools like the Relative Strength Indicator (RSI), Bollinger Bands, and the Candlestick chart can be used to determine all of these values.

Fundamental analysis in determining your trading strategy should also not be underestimated. Primarily, the world’s financial markets are influenced by the global socio-economic (including macro- and micro-economic) as well as the global geopolitical events. Furthermore, the stock markets all take direction from each other.

For example, the Tokyo exchange opens before the London exchange. Therefore, if the Tokyo exchange is down, it is feasible to assume that the London exchange will open down.

Thus, it is vital to study aids like the Economic Calendar and to be cognisant of the day's major news events while you are planning your trading strategy. Otherwise, you run the risk of placing losing trades instead of profitable trades.

Final thoughts

Even though the intricacies of CFD trading must not be underestimated, taking the time to learn to set up CFD trades, especially during times of market volatility is well worth the effort.

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

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