CFD trading is a bit like news reporting: what matters is not so much whether things go well or not, but whether you manage to catch a potential opportunity on time. New to CFD trading? Let’s cover the basics of exactly what CFD trading is.
In a nutshell, Contracts For Difference or CFDs allow a trader to invest in the price movement of a trading instrument such as commodities, shares, indices, ETFs, cryptocurrencies or foreign currencies (forex) in both directions—that’s increases as well as decreases—without the need to purchase the underlying asset. So, for example, he expects the price of oil to rise, he’d open a ‘Buy’ deal or ‘Go long.’ If he expected the price to fall, he’d open a ‘Sell’ deal or ‘Go short.’ At no point does he own any actual oil, rather he’s trading on the price movements.
CFD trading is accessible in present times because many brokerages have popped up and created electronic platforms, made for desktop and mobile use, which allow traders to access all kinds of financial instruments as well as helpful tools and features. But like all forms of trading, CFDs come with risk, so let’s take a closer look at what CFD trading entails and how to get started.
CFD Trading basics
CFD trading operates across six categories of instruments in the world’s major financial markets including shares of companies like Apple, Amazon, Netflix, and more, as well as ETFs, forex pairs, global indices, commodities like gold, oil and wheat, and crypto currencies including Bitcoin, Ethereum and Ripple. The process begins by opening a brokerage account with a regulated CFD broker. Be sure to choose carefully, looking at the different platforms available and seeing if they fit with your needs. After you open an account, start by perusing the educational materials available on the platform and start expanding your knowledge about CFD trading, the financial markets, and specific trading instruments. This should take a substantial amount of time, and even continue indefinitely after you start trading, so there’s no sense in rushing. Then, before you actually start trading CFDs, test the platform and your knowledge with a demo account so you can start to feel comfortable with it before any of your money is on the line.
When you feel more prepared, stay in touch regularly with market news, as it can alert you to potential trading opportunities as well as give you a general sense of where the markets are headed. Let’s say you read the following report, which appeared on Bloomberg on May 19th this year. “Bitcoin, which has rebounded about 15% from its crash lows of last week, is looking increasingly vulnerable to another drawdown”. You go on to read more about how technical analysis indicates Bitcoin is unlikely to continue its rally, and that another dip in prices may be on the way. This might cause you to consider opening a “sell” deal on Bitcoin, but you bide your time four more days, and then read a different report on Bloomberg: “If the S&P falls some more, that should create one final flush and a great buying opportunity for Bitcoin”. Now you’re unsure: you see evidence that a big buying trend may be on the way. Maybe your deal should be a “buy” deal. Your job now consists in reading a lot more material on the subject to gauge which way prices are likely to turn, and, more importantly, when they are likely to move that way, and then make your move at the right time.
Opening Your First CFD Trading Deal
When you feel you’ve got enough knowledge to open your first deal, and you’ve studied the charts of your chosen instrument and are ready to progress, you must choose to open a ‘Buy’ or ‘Sell’ deal. In addition to this, you’d employ a number of trading tools and features, including technical analysis charts, the trading sentiment feature, and perhaps even peek at your broker’s economic calendar to see if any important financial meetings are coming up that could affect the price of your instrument. Once you open your deal, you can monitor its progress until the close and hope it turns out to be successful.
It’s important to realize that, as you progress, your trading activity should be done in tandem with consistent learning. There is a whole library of tools and methods which can be used to hone your trading technique, for instance candlestick charts, Fibonacci ratios, and MACD lines. Get in the habit of enjoying the learning process because the more knowledge you have, the more insightful CFD trader you’ll turn out to be.
Published by Samantha Brown