Trading on stocks implies a wide range of services and opportunities. If you have already mastered Forex and want to take your skills to the next level, pay attention to online CFDs trading. It is a leveraging tool that requires a certain amount of experience and knowledge. In this article, you will find out what it is, what are the main strategies in this area, and exactly what newbies should pay attention to.
CFD Definition and Benefits
Contracts for differences are a financial instrument that allows investors to capitalize on price fluctuations. Thus, you have the opportunity to make a profit both on the rise and fall in the product cost. It is noteworthy that you do not need to buy an asset itself to participate; you only bet on the change in its price. The distinguishing characteristic of CFDs is their high leverage, with which the main risks are associated. It means that the more you invest, the more you can earn or lose. You can start trading CFDs even with small start-up capital and access any stock market from one account.
The key to success in this direction is to predict price changes correctly. To reduce risks and achieve success in CFD trading, specialists have developed a number of strategies.
1. Long trading
It is the easiest option for beginners to start with. Its essence lies in the fact that you purchase a contract and enter the so-called "long position." To make a profit from it, the price of an asset should increase from the moment of your buying. As a rule, it is easier to make predictions in a long position, and the trade duration is from 30 days to a year.
2. Short trading
This strategy is completely opposite to the first one. A trader should sell a contract when opening a position if they expect the asset's value to fall. If it does not happen, you will incur losses. This model allows you to profit within short periods of time (up to one minute).
Traders often use the CFD market to hedge real exchange positions. In this case, it is necessary to buy a contract for the opposite item. As the risk on the exchange increases, you have the right to partially or completely cover the exchange position with an opposite one on CFDs.
4. Pair trading
Using this strategy, when selling CFDs on one asset, you should simultaneously buy a contract for another close to the first. Due to the influence of the same factors on the prices of both items, the risk is significantly reduced. In other words, in the event of losses under one contract, you can profit from the other, but the price change for both assets may differ. In the same way, you can use the calendar spread when you conduct a counter trade on the same item but in different months.
Useful Tips for Beginners
CFD trading has undeniable advantages, but at the same time, it is associated with high risks. To minimize them, study how they work and learn the specifics of the market. Regularly improve your knowledge and practice new strategies on a demo account so as not to lose your real money. To be successful, you should have a well-written action plan and strategy. Indicate for yourself the amount that you are ready to lose, and mentally prepare for possible failures. Never invest all your capital in one sector; choose two or three areas of interest to avoid catastrophic losses. Since the CFD market is very dynamic, you too need to be flexible and ready for changes.