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Contracts for Differences (CFDs) are financial instruments that allow users to speculate and hedge positions in the financial markets without taking any ownership of the underlying assets. CFDs utilise leverage to allow for greater market exposure and deliver an arrangement whereby the settlement differs between the opening and closing price of a position (trade), then they are settled between the two parties through cash settlement.

CFDs cover a wide variety of financial asset classes such as equities, commodities, metals, indices and cryptocurrency. They allow individuals to trade the price movement on a financial asset by either going long or short.

Is CFD Trading Safe?

CFDs are leveraged instruments and therefore have the potential to amplify gains, however, this also implies the that downside risk increases in the event a position moves against the client.

Controlling risk or ‘risk management’ is key to a trader’s success and will help prevent the positions from being liquidated. It is essential that effective trading strategies and plans are in place to help manage these risks while maximising profit taking opportunities.

• Risk Management

Risk management refers to the process of identifiying potential threats to a client’s exposure in the market, this process will help limit the potential losses. Without proper risk management, individuals may run into significant losses and potentially lead to positions being liquidated for not maintaining sufficient margin.

Common risk management tools include using stop losses, stress testing, diversifying your portfolio, and ensuring the trading account has sufficient capital at all times to avoid entering stop out.

• Will you Have any Issues When Trading CFDs?

Trading CFDs are prohibited in several jurisdictions, most notably American citizens are restricted from accessing CFDs. It is recommended to research the jurisdictions that you reside in before commencing trading CFDs.

• Limiting your Risk

Never invest money you cannot afford to lose and consider the risks carefully before executing a trade. For beginner traders, is important to monitor your trades as the market can move rapidly.

• The Use of Protective Stop-Loss Orders 

Stop-loss orders are in place to reduce risk. It is important to consider the stop-loss distance and methods by which it is employed within your trading plan.

• Leverage

Leverage is a service offered that enables you to enter into positions with greater exposure with smaller upfront capital. This  amplifies your profit potential as well as downside risk. It is therefore crucial to consider how much leverage is suitable for the trading strategy and plan in place.

Make sure you understand the total position size, then begin small and gradually expand your trading portfolio. Trading CFDs is generally considered for shorter term trading, however, medium to long term trading can also be done.

How to Trade CFDs?

It is imperative for individuals to build a well thought out trading plan and strategy. Moreover, individuals should do extensive research on the asset classes, current news, and practice trading strategies on a demo account.

To perform well in any market, individuals will need to build the necessary trading skills by being disciplined and patient.

• Build a Trading Plan

Behind all successful traders is a great trading plan. The things one must consider when building a plan are: Attitutde towards risk, available capital for trading, risk management, strategies, markets & assets, and record keeping.

A trading plan is a MUST. Think carefully, plan, execute.

• Build a Trading Strategy

Within the trading plan must contain a well-defined trading methodology. This, either in the form of technical analysis or fundamental analysis, it is how traders engage with the market and locate trading opportunities. Finally, you must choose which type of analysis suits your style of trading.

The study of price action is known as technical analysis. Analysts believe prices follow patterns, and history repeating itself. This can be as simple as employing moving averages and a technical indicator, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) (RSI).

Fundamental analysis on the other hand, is the process of examining securities to determine the value (also known as intrinsic value). By evaluating economic, financial and geopolitical events, traders are able to forecast long-term direction.

Education

Like most things in life, education is paramount to performing at your best. Visiting FP Markets education section is beneficial. There are various articles on how to trade CFDs.

Visit FP Markets website and expand your knowledge regularly.

Ultimately, everyone style of trading is different. Sometimes traders tend to agree to disagree. Again, do your due diligence. It is ultimately your responsibility.