One of the reasons that contract for difference (CFD) trading has become so popular is because it essentially democratizes taking positions on a wide range of different markets. Using CFDs to make trades doesn’t mean having expensive advisors or using complicated brokerage systems that can be confusing and costly. In fact, the opposite is true, as opening an account to begin CFD trading is easy and straightforward and actually involves much less capital outlay than many other forms of trading.
Of course, making a good CFD trade is key to success, and that is something that professional financial investors would claim to be able to do. However, where CFDs really come into their own lies in the way that many different approaches, methods and strategies can be employed, meaning that even a novice can get up and running very quickly.
What makes a good CFD trade?
The yardstick for deciding whether a CFD trade is a good one is quite simple — does it end up making a profit or does it result in a loss? Anyone familiar with other forms of trading might find this an obvious thing to say, but in terms of CFDs, the result can be a good one when the price or value of an asset goes down, depending on which ‘position’ a trader has taken.
Other forms of trading on the markets are often based on the actual purchase and sale of assets, be they stocks and shares, commodities or bonds. In these cases, an asset will be bought at a certain value and sold later for a profit or sometimes for a loss if it looks like dropping even further in value. In some worst-case scenarios, certain investments might even end up being totally worthless.
A contract for difference trade never involves ownership of the underlying asset on which the position is taken. Instead, the trader makes a judgment as to whether the price of the asset in question will go up or down. This is called taking a ‘short’ or ‘long’ position. When the trade is closed, the price difference is evaluated, and the trader then makes a profit or a loss.
Investors using CFDs have many advantages over others as this form of trading has in-built flexibilities, such as using leverage, choosing from a vast range of different markets, and taking advantage of global trading on a 24-hour basis.
CFD trades are extremely popular on forex markets, including cryptocurrencies, as a successful trade can be based on either a rise or fall in the value of an asset or market. This means that volatile environments can prove to be fertile ground for the contract for difference model.
Knowledge of certain industries, sectors or markets is something of a prerequisite for many forms of trading, but again CFDs present something of a different picture in this regard. Of course, having any kind of ‘inside information’, whatever assets are involved, will always be beneficial. However, when the underlying asset itself is never owned, an aspect of ’emotionless trading’ can be important too.
Essentially, this means using data and analysis to come to trading position decisions rather than being influenced by other factors, such as perhaps an interest in ‘green’ investments or a belief that a certain product or service has an intrinsic value that goes beyond a simple investment consideration.
The use of technical analysis is something that plays a big part in knowing how to trade like a CFD professional. Although there are many strategies that can be employed, technical analysis is particularly suited to contract for difference trading because it emphasizes short-term trends.
As a tried and tested tool that creates short-term analysis results from easily available data, this form of monitoring trends is far more effective for CFD investors than the long-term results that come as a product of fundamental analysis.
CFD traders are drawn to the idea of high-frequency day trading where small fluctuations in prices can be exploited quickly. However, this doesn’t mean that technical analysis is a ‘one size fits all’ solution. For one thing, it does involve a steep learning curve and a certain amount of dedication to learning how to utilize the information that it produces. Also, it usually needs to be used in conjunction with other methodologies to come up with a personalized approach that is unique to each trader.
A professional in any field needs to learn discipline and know how to make the right call at the right time. This is something that can only really come through experience and making mistakes in the world of the markets and investments is something that can be costly.
As with most other disciplines that involve building up a knowledge base from actually being involved in the processes as they run their course, developing the necessary skills and techniques that lead to success takes time and effort. Making a good trade can be a ‘first-time lucky’ experience, but that isn’t the way that a longer-term success rate can be managed.
Having a serious game plan, good working knowledge of various strategies and processes and a full understanding of basic elements, such as leverage and stop-loss orders, are all bottom-line requirements before serious CFD trading can begin. However, once an investor is armed with the knowledge needed, CFD trading can be a way to compete with the professionals on a level playing field without the need for large capital funds to begin trading successfully.