CFD or Contracts for Difference is a way to make money by predicting the price of something legally. It means you don’t need to own anything to invest. Buy based on what you think will happen.
Types of CFD strategies
When trading in CFDs, it is crucial to be aware of the different available strategies. Investors can use a variety of trading styles, and by knowing these different types of strategies, traders can improve their chances of success when investing in CFD markets.
There are three basic options for traders when deciding on how they want to trade with CFDs.
Firstly, they can use an un-leveraged position, where the level of gearing that they are using is fixed at 100%. Traders will always have their total buying power available in their trading account, so there is no element of risk when trading. Some brokers also offer a “mini” or “micro” account type, which means that the level of leverage is reduced, giving traders more buying power than they would typically have.
The second way to trade is using a leveraged position. It enables traders to increase the amount of capital they use in their trading account by effectively borrowing money from their broker. The money they borrow will be held in a segregated account, so if the market moves against them, there is no chance of it being used to repay any loans taken out. However, as with all forms of investing in CFDs, traders should only ever use a level of leverage that they know their trading capital can afford to lose if things do not go as planned.
The final option is a bit of a hybrid between the two. Traders can choose to use an adjustable leveraged position, which allows them to trade with minimal capital initially and then increase this level in increments as their trading account grows and they feel more comfortable investing more significant amounts of money. This approach means traders can avoid putting all of their eggs in one basket by starting with a smaller amount and then gradually increasing their exposure to CFD market movements as they gain more experience.
What are the risks associated with CFD trading strategies?
Be careful about which direction prices are moving because it’ll change how much you win and lose. For example, if you are short selling Bitcoin (betting against Bitcoin by saying it will decrease), there’s an extra cost for you than buying Bitcoin. It’s mainly because your broker needs to make sure the person who bought from you has money in their account and can receive Bitcoins when you sell something.
When someone sells Bitcoin through a broker, there is a specific period where the Bitcoins need to be delivered before they go negative in value. If it doesn’t happen in time, the broker is forced to buy them anyway, so they don’t lose anything on the deal.
What are the benefits of CFD trading strategies?
CFDs have the added benefit of being incredibly flexible for traders. This means that CFD trading strategies can vary wildly. It might simply be a matter of timing an entry based on technical analysis, maybe it is about finding support and resistance levels before placing a long or short position, or maybe it is about spotting market crashes and capitalising on the downside.
CFD trading is all done without trading in real currencies – it’s merely based on numbers and agreements with traders. It means that you don’t need to have any capital to start trading at all! So long as one of your customers agrees to pay up when you cash out, then there’s no risk for either party involved, and you can trade without worry.
CFDs can provide them with endless opportunities for traders looking for an alternative way to invest in the markets. By understanding how different trading strategies work within the structures of these instruments, traders will be able to make more calculated investment decisions when trading in these markets. New traders can use CFD trading platforms and practice on a demo account before investing real money.