Many beginner traders get confused once they come across the term CFD, which is short for Contract For Difference. CFD might look scary and even sketchy, but we wouldn’t write about it without a good reason. Contracts for difference are great tools if you know how to use them, and strategies connected to them are useful, not that hard and techniques are unique but profitable. In essence, it means that you can profit on the market without owning an asset but benefiting from the price movement itself. This means you don’t have to buy, sell, or invest in a specific stock, which is one of the main differences between CFDs and regular trade.
How does it function?
A CFD contract has to have two parties; both agree they will pay the difference price between opening and closing a chosen asset price on the market. Two sides must be included in a CFD contract, where they agree to pay the fee of the difference between the opening and closing price of a chosen asset on the market. This is called “speculating”, and it involves profit or loss that can be made when the underlying asset switches its opening price position. As you can tell, what you are doing once you decide to go with a CFD contract is that you are speculating if the price is going up or down, and that’s how you will make a profit. As we said, it doesn’t include owning the asset you are speculating on. Most often, traders will speculate when it comes to Bitcoin, oil and currency pairs.
Pros and Cons
For almost everything you see on the market and sparks interest, you can use CFD trading options. It doesn’t matter if it’s crypto or commodity like we mentioned above. CFDs are attractive because of obvious reasons – there are minimal costs, and fees are low. Why? Because you are usually making CFDs with a broker and earning money when you pay the CFD spread. The leverage is also a lot higher, unlike when you are trading the standard way, and you can get too big positions thanks to low margin rates. The catch is, you have to be aware that, the higher the risk, the higher the chance of losing. Be mindful of that and do proper research before getting into CFDs. Another great thing is that CFDs can last a long time, which means you don’t have to take a position as soon as you open a contract. This is great if you want to observe the market and wait for the right moment, especially if you are experienced enough to know when to act.
As we said, there aren’t many disadvantages, but you should pay attention that your broker is regulated because the CFD industry isn’t entirely. Once again, be aware of the risks, and since you can gain much but also lose as much, you need to have money (just in case), if you need to cover the “price” of the loss.
CFD Trading Strategies
There are several strategies for trading CFDs, and the most popular is the Breakout strategy and Contrarian CFD strategy. The first one is more suitable for experienced traders since you need to know how to observe different patterns and charts to spot a clear signal. It takes time to learn this. So maybe it’s better to go with the Contrarian strategy if you are a novice. This doesn’t mean it’s easier to predict price movement, but it relies on timing so you can speculate in which direction the price will go.
As you can tell, CFD trading can be an excellent way to earn a profit if you don’t want to buy an asset. If you’re going to try it out, it would be good to have previous trading experience, so that you don’t go into it completely confused about everything. Otherwise, good luck and we hope you profit from it!