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Beginners Guide to CFD Trading

InvestorEducation / Learn to Trade May 31, 2017 - 05:33 PM GMT

By: Submissions


So, you’ve been researching investing, or already have a degree of experience in investing in financial vehicles, and have come across Contract for Difference, or CFD, trading, and are wondering whether or not it is right for you. Maybe you’ve heard some success stories about individuals making huge returns on CFDs, or maybe you’ve been warned off them by people who have made huge losses. We’re going to dispel the myths, and give you the knowledge you need to start CFD trading.

How does it work?

Firstly, you need to know how CFD trading works. With CFD trading, you never actually own the underlying asset that the Contract for Difference is tracking, in stark contrast to trading assets. Instead of paying a commission, you pay on the spread when purchasing or selling CFDs. This will still mean that you spend a significant amount, but it is often less than the commissions and other fees that come with trading more traditional assets. To use an example, if you purchased 100 CFDs with an ask price of $40 from a broker, you would immediately display a loss on that purchase due to the spread. If the spread is 2 cents, then the underlying asset would need to appreciate by 2 cents to make up for the loss. If the stock appreciated by fifty cents, and you chose to sell, you would again lose a couple of cents on the spread. Instead of making a $50 profit on 100 shares you might make $48/$49.

The stories of large profits and losses come from the lower leverage needed with CFD trading. If you’re going into CFD trading with the hope to get rich quick, then you’re going into it for the wrong reasons – the huge success stories are the exception, not the norm. That said, those who have lost huge sums of money likely did so because they didn’t follow the basic rules of trading.

What’s your market?

Before anything else, you need to choose a market that you want to invest in. You should know this market inside out, to the point where you should have an idea of potential market upsets before they happen. You should know the various players and how they’re performing. You can be a fantastic mathematical analyst, but if you don’t have a wider fundamental understanding of the market, then you are at a major disadvantage.

Who’s your broker?

Once you have a chosen market, it is time to choose a broker. One aspect of CFD trading is that compared to other types of trading, it has relatively little regulation. This is great in many ways, but it does mean that choosing a reputable broker is even more important. It is important both to shop around for the best deal, and to thoroughly investigate any broker before you trust your money with them.

Keep track of your investments

So now it’s time to invest, right? Not quite. You need to create a comprehensive investment plan, in which you detail what trades you will make, the reasoning behind your trades, and what levels you will sell at for a profit/loss.  An integral part of this investment plan should be an investment diary, in which you track the details behind your trades, your emotional state, and what went well or badly.

If you go into CFD trading having researched the market, with an investment plan, and with an

The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2017 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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