How To Get the Most Out of CFD Trading

What Is CFD Trading?

Reading time: 7 minutes

The explosion of CFD trading has opened the modern trading floor to anyone with disposable capital and an internet connection. There is a plethora of online brokers and trading platforms offering access to the financial markets through CFD derivative instruments (Contract for Differences).

CFDs act as an agreement between two parties to exchange the difference in price between the opening and closing price of a trading position. While traditional investing involves purchasing physical shares on a public exchange or any underlying physical asset, with a CFD trading account, an investor doesn’t take ownership of the underlying asset (CFD traders trade based on the underlying price movement of an asset).

CFD trading offers the trading community some unique features. Most perceptibly, it’s easier to short-sell with CFDs, meaning returns can be generated from both a rise (by going long) and a fall (by going short) in price action. Also, as CFD traders do not own the underlying asset, access to higher leverage is possible (leverage is achievable when trading/investing in non-derivative products, though it is more restricted compared to the derivatives market), thus requiring only a small fraction of upfront margin on the total trade value (notional value). Whilst leverage can supersize potential profits, losses are equally magnified. This is why it is recommended to always trade with a back-tested trading strategy and adopt a well-defined risk-management approach.

Research Is Key

Blind trading isn’t all that different from gambling. Education and insight are critical to getting the most out of CFD trading, so beginner traders must make sure to do their due diligence before thinking of opening a position on a live account. Demo accounts are a must for new and inexperienced traders; at the very least, they allow for mistakes and allow traders to familiarise themselves with the markets and the trading platforms.

FP Markets has its trove of up-to-date market news and information presented through the Traders Hub, including technical analysis and fundamental analysis, as well as the Trading Academy to help traders understand the basics. While the internet is broadly a good source for information and research regarding trading, it’s important to be careful of false or misleading information from unreliable sources. Despite this, the internet can still be an invaluable research tool to help you get the most out of CFD trading.

You will unlikely get the most out of your CFD account without doing the correct research. It’s not an easy journey and requires a serious amount of time, focus and patience to achieve any sustained success. The research will involve learning the basics of CFDs, testing different technical and fundamental analysis strategies on a demo account, risk-management practice, and perhaps wider learning surrounding global economics and market trends. If you’re not constantly learning, you’re cutting your potential short.

Utilise Short Selling

One of the key features available for CFD trading strategies is the ability for any retail trader to go short. In other words, the trader speculates that an asset's price will depreciate (the trader, thus, assumes risk [hedging transfers risk]). A return is generated if the underlying asset trades lower, meaning traders can benefit from all types of market sentiment rather than just looking for assets with potential price growth. Regarding technical analysis, the ability to open positions in both directions opens a whole other ballpark of potential trades. For day traders and scalpers, this is incredibly useful because they can use short-term volatility as an advantage, opening various trades in both directions over the trading day or week. Be careful, though. When short selling, make sure to protect your position with protective stop-loss orders as otherwise, there is no maximum loss as the price can move infinitely upwards but not the other way around. For example, short selling on negative company news can be risky for high-growth companies like Apple.

Diversification

The cutting-edge tech behind CFD brokers allows the masses to access a diverse range of financial instruments, from currency pairs to commodities, like oil or grain, or global indices like the FTSE 100 or S&P 500.

FP Markets offer CFDs on various asset classes, including individual stocks, global indexes, currencies, commodities, bonds, digital currencies and more.