Contracts for Difference (CFDs) provide an opportunity to potentially profit from the price movement of an underlying asset, in both rising and falling markets, without owning the asset. CFD trading has gained popularity in recent years due to the numerous advantages it offers, however, it also carries a lot of risk which can be detrimental to success. This article provides some insight into how you can increase your chances of trading CFDs successfully.
Know What You’re Getting Into
Before you can trade CFDs successfully, you need to build your knowledge. It’s important to understand CFDs, both in terms of trading basics and factors affecting particular trades. For instance, one of the most important basics is that CFDs are leveraged financial products. This means that while returns are magnified, it’s also easier to wipe your entire account – the leverage can magnify your losses to a point where the losses exceed your deposits for individual trades. That’s unless you are using risk management tools which we’ll come to later on.
When it comes to trading specifics, you have to learn that margin, leverage, and stop losses can behave unexpectedly due to gapping in the market. You need to ask yourself if you understand things such as price gaps, overnight fees, margin calls, and higher spreads and how they will affect your CFD trading.