A contract for difference or CFD is a contract between a seller and a buyer in which the buyer has to pay the difference amount to the seller between the value of an asset at the present and the value of the asset at the time of contract. It is considered similar to professional gambling because like gambling you need to use money management, risk management, trading skill, patience, discipline, and self-control to succeed.
To involve in CFD Trading you should know how it works.
- It is considered leveraged because it allows you to bet on the rising and falling of a currency, assets, and shares without spending a huge amount of money.
- Making a trade sometimes allows you to purchase as small as 1 percent of the market value of an underlying asset.
- CFD users see this as an easier method of the bargain for both parties are paid in cash whether you lose or gain.
- Always opt for trades where you actually get ownership of the underlying asset, you want to buy stocks than buy stocks in a normal way where you have ownership of those stocks instead of getting yourself involved in gambling in the name of derivative “trading” of stocks such as Options gambling or CFD gambling.
- If the broker has an opposite order at your price coming from another of their retail traders, then you get filled with that.
- If the broker has no order available then they become your counter-part.
- There are some risks too like possible large slippages and possible large stop-loss slippages. This might drastically affect your account, in case of market flash crashes or events similar to what happened to the markets.
- One of the advantages of a CFD is it hedges your portfolio against detrimental market movements. With CFD, there is a spread between buying and selling. This means that whether you go long or short into a trade, you immediately see a negative. Even if you are at a higher base cost than an entry in a long position, you could be already losing money.
- Most day trading methods based on a 1-minute chart are at a higher risk than most other trades, this becomes more so when you immediately lose an entire proportion of the trading range to spread, and when you add in my next point it is a sure-fire killer.
- Depending on your platform, the stop losses you may usually take based on reasoning and RW ratios are impossible with CFD’s. You are often limited to a distance in which you can place a stop loss on a trade or even a take profit order. This means you are forced into an unfavorable risk-reward ratio.
CFDs are a powerful trading tool when used properly, but they are generally designed to be favorable to the broker. Not to say that when you trade smart and are looking at longer plays you can’t make money, but most new traders will be lulled in by the wins and get big losses.