How CFDs Can Help You with Successful Trading

Aspects of successful CFD trading

Contracts for difference were developed during the 90s in London, so they are relatively ‘new kids on the block’ in the realm of financial trading. They are derivatives rather than direct investment vehicles, and they first gained popularity when large investors use them to hedge exposures. Since then they’ve become available over-the-counter (OTC) so interest in them has risen steadily. The benefits of CFDs include the fact that they can be used to short sell, they come with the potentially lucrative convenience of leverage, they don’t attract tax in the UK, and they don’t involve ownership of any physical assets which need to be stored or moved. Short or long positions can be taken on virtually any asset, and the trader is never burdened with taking delivery of anything. He merely places wages on price movements.

Tracking

CFDs track the price of an asset, so that could be the price of oil, Gold, the NASDAQ, a forex pair or anything else that is traded. This means that ‘trading’ is probably the wrong verb to apply to CFDs, but it arguably sounds more appealing than ‘placing bets’ which is essentially what the two parties involved will do. They enter into a contract where they agree to exchange the difference in the price of an underlying asset between two dates. If the asset goes up, the ‘seller’ pays the ‘buyer.’ If it goes down, the ‘buyer’ pays the ‘seller’.

Costs

During the time that a position is open, it accumulates charges, which helps to explain why it’s so popular to use this tool for short term, and even ultra-short-term trading, where positions open and close within minutes. This flexibility is another reason why CFDs stand apart from other derivative instruments. Commission is usually charged at 0.10% of the face value of the CFD at both the open and exit points. Deals vary from broker to broker, with some offering fixed prices and transparent fees. Some do offer commission-free trades, but these need to be looked at carefully because the fee is factored into the spread, so they can end up being more expensive then you’d first expect.

Leverage

As we said, leverage is a big part of CFDs’ appeal, because it lets investors trade on margin. They only need to put up a small fraction of the trade’s total value to participate. Of course, that’s okay if they win the trade, but if they lose, the losses can be eye-wateringly large.

That’s why successful CFD trading requires deep respect and understanding of leverage. Stop-loss orders become especially significant, and research becomes essential. It’s not safe to dabble with CFD trading. It’s something that you can only safely venture into fully prepared.

Pairs trading

Because you can make money with CFDs by successfully shorting assets, this makes forex markets the go-to option for those trading in them. With pairs trading the idea is that you ‘buy’ a currency and ‘sell’ precisely that amount of another one, in the hope that the long currency will do better than the other. So, you’re forecasting on the relative performance of two assets instead of their real-world individual performance, and this ideally suits the fast-moving forex markets environment and fits in well with how they work.

Golden rules

Successfully trading with CFDs is all about knowledge. You have to treat this venture as an ongoing experiment where you record everything and use what you’ve recorded to inform your future trading decisions. It’s the only way to know if your trading plan is working as well as you’d hoped and how well your technical analysis is bearing up in the real world.

As CFDs are derivatives, so you shouldn’t be burdened by any sentimental attachment to a particular asset. All you’re doing, as we’ve said, is speculating on the movements of asset prices. Some traders get sucked into an emotional attachment to assets which can cloud their judgement. It’s purely a numbers game and is best treated as such.

As a trader, you need to approach CFDs with patience, caution, research, and perseverance. Patience might seem like an odd virtue to uphold in the fast-moving trading environments, but it’s actually part and parcel of the longer-term game that you need to play because it will help you to get through the inevitable losses, and indeed losing streaks, that go with CFD trading.

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