MANU RAMOS. Contracts for Difference (CFDs) are financial instruments that pay the difference in price of an asset between the opening and the expiration of a contract. CFDs are very popular in the Forex, stock, commodity and crypto-currency industries, as they allow you to try to make short-term predictions about the movements of such instruments without actually owning them. Since CFDs are compatible with margin trading, profits can be relatively high as well as losses. You can find many tips on the internet, but in this article we will concentrate on tips based on responsible trading principles. Below you will find 6 tips that any trader should know before opening their first trade.
1. Use a recognized and licensed broker:
The growth of CFD trading has led to the emergence of several brokers, some of which enjoy a better reputation than others. Finding a licensed broker that complies with legal regulations and is supervised by a reputable entity is of vital importance to the safety of your investments. Information about licensed brokers can be found on the websites of regulatory agencies. On these portals you can easily look up the license numbers of any broker you are interested in to obtain their data and history.
An example is the online CFD broker and trading platform capex.com. capex.com is licensed by the CySEC (Cyprus Securities and Exchange Commission) and is regulated by several entities, such as the FCA (Financial Conduct Authority) and the FSCA (Financial Sector Authority). Thus, you know that the online CFD trading platform capex.com is subject to strict rules regarding its activities and the security of its clients’ funds and personal data.
2. Start with a demo account:
Many brokers offer demo accounts for users to test and get to know the trading platform before investing their own money. Regardless of whether it is a popular tool such as MetaTrader or a customized solution, it is recommended that you understand the functions, order types, and charting and research tools of the platform you will be using. Demo accounts allow you to learn about these features, as well as give you an idea of how leverage works.
Traders mainly use two techniques to analyze the market: Technical Analysis, which studies historical and current market movements and trends through charts, indicators and analysis tools. Fundamental analysis, which studies the macroeconomic factors that impact the financial markets. Some factors considered in fundamental analysis include central bank meetings, interest rate announcements and decisions (especially those of the Bank of England, the U.S. Federal Reserve, and the European Central Bank), political events (such as elections), trade agreements, and other events that have a general impact on the economy. Technical indicators are used in conjunction with fundamental analysis to create a comprehensive CFD trading strategy.
4. Create a trading strategy:
Before opening any trade, make sure you have a trading strategy. For CFDs, it is important that you clarify your risk tolerance level in advance to create exit rules based on likely scenarios. It is also crucial that you always follow your strategy and don’t let your emotions take over. The market is always offering new trading opportunities, but if you don’t trade responsibly, you won’t have enough funds to take advantage of them. For this reason, experienced investors always use a responsible trading strategy to preserve their money.
5. Use stop-loss and take-profit orders:
Stop-loss and take-profit orders are instructions to automatically close a trade if the price reaches a specific level. No one can constantly monitor your investments. However, with a stop-loss order you ensure that you close your trade and mitigate your losses in case of considerable price fluctuations. On the other hand, with a take profit order you make sure to automatically close your position when your profit target is reached. Stop-loss and take-profit orders are vital in traders’ activities, and are part of a comprehensive strategy to maximize profits and minimize losses.
6. Use leverage wisely:
The leverage ratio is a comparison between the amount a trader has invested in his trades and the amount of credit he has available with his broker. Many traders use leverage as a way to amplify their trading volumes and, in turn, their potential gains. While leverage can generate higher profits, it can also worsen losses. A prudent way to use leverage is to apply a ratio that is consistent with your level of risk tolerance. Leverage requires a responsible approach, so only use it if you have the ability to repay the credit you are given. CFD trading is considered a relatively risky activity, and leverage only amplifies that risk. Learning and periodically reviewing the tips in this article will serve as a reminder and help you keep your feet on the ground when navigating the CFD markets.