Is CFD trading so difficult as it looks? Not when you know what it is about. To outline the main benefits there will be a lot of time needed. So only the major ones should be shown. First of all knowing the definition of contracts for differences is crucial before diving into markets. Basically it is a contract between two parties for a deal for certain asset. The first counterparty hopes exactly for the opposite direction of the price than the second counterparty. To illustrate an example let’s assume that a trader decides to open an account and trade gold.
Usually the broker is acting as a dealing desk to the trader offering him bid and asks quotes for CFDs based on asset. Our trader decides to buy gold, so he places a long order, i.e. he buys gold now hoping that the price will rise in the future. After 2 hours the price goes up and the trader decides to close the position. All he has to do is to just place the opposite order of the same size and realize profit. Of course, if the price had gone down instead of profit our trader would have realized a loss.
Before opening a live account and invest real money each trader can open a demo risk free account to test his strategies. This is possible because a lot of brokers out there offer such services, even for a few months. Opening a demo account is quick and easy and no personal information is required at all. Just provide your username, password and contact email and that’s all. Access to more than 1000 Shares via CFDs are available in the trading platform provided by this UK CFD broker. Testing the strategy before going live is always the best solution.
As soon as you choose your markets it may be a good idea to decide how to allocate your trading portfolio. Putting all eggs in the same basket is a well-known “no-no” for investors. Try to find correlations between different assets and place orders wisely. The high leverage is always interesting for big profits but it can also turns against you. So be careful and invest only the funds you can afford to lose.
The best practice (it is stated by some of the most reputed CFD traders) is to never risk more then 2% of your account in a single trade. That’s not exactly what you can do when you just have hundred of US dollars in your account. So if you start with such amount, you can still place larger trades.
James Williams is an experienced Forex and CFD trader. He studies new trading strategies and trades CFDs with DF Markets