- CFDs offer opportunities worldwide
- The ability to customize size is a major benefit
- Start small to build confidence
Trading the contract for difference (CFD) markets offers plenty of opportunities for traders to take advantage of price movement in a variety of financial markets. The contract for difference markets is a way to trade a financial asset without actually taking delivery of that product. For example, instead of buying S&P 500 futures contracts, the trader can enter an agreement where they will either be credited or debited the difference in price once the trade is closed.
In this sense, CFD trading is an easier way to trade the world’s financial markets. Most CFD brokers offer a multitude of financial instruments and therefore offer diversified trading. It is not uncommon to have the same broker offer the S&P 500 contract, the gold contract, and crude oil. Being able to spread out your exposure in various markets can prove to be quite profitable.
Major advantagesCFD trading offers significant advantages to traditional financial markets. While the average CFD broker offers diversification, there are other advantages worth considering. The ability to trade partial contracts allows for a much granular experience when it comes to risk management. For example, you can trade as little as 0.01 contracts, instead of being forced to buy an entire futures contract, which can make the mitigating of risk very difficult as you can become overexposed.
CFD markets are also levered instruments, meaning that you can control a much larger position than your account size would typically allow. As such, those bigger positions can add up to much larger gains, but caution should be used as they can also add up to much larger losses if you are not careful.
CFD trading has evolved into the cryptocurrency markets as of late, which adds even more value to the trading of the CFD markets and a way to play the blockchain, as those who are not looking to invest long term into crypto can still benefit from price movement, without the hassle of acquiring coins or keeping custody of them. It also eliminates so-called “gas fees”.
Your first stepsThe first step to trading the CFD market is to find a reputable broker. The broker allows you to enter the marketplace, offering access to a “pool of liquidity.” This is simply a marketplace where other traders are willing to buy and sell the same contracts. You should be looking for things such as financial regulation, a solid trading platform, and any value-added research that you prefer.
After choosing a broker, doing research on which market you choose to trade and what moves them would be the next step. For example, gold is highly sensitive to the interest rate markets and is used as a safe asset. In early 2022, we have seen gold markets rise significantly due to war breaking out in Ukraine, and previous to that, inflation took hold worldwide.
Developing a trading system or methodologyOne thing that keeps traders profitable is by following a particular trading method. This is where the real work comes in because you will need to decide whether you are going to trade solely based upon the movement of price, or if you are going to try to trade based upon economic fundamentals. While there is no particular right or wrong way to go, most traders will use a mix of the two.
Backtesting your strategy is probably one of the most important things you can do. This is the process of seeing how your strategy performs historically, measuring the percentage of trades that typically are profitable. This will keep you confident going forward, because not every trade will be a winner. A professional and successful trader understands that even for a string of losses, longer-term a profitable system will be just that, profitable.