Do you want to trade CFDs? Trading CFDs can be very profitable if done the right way. Follow these simple steps to get started.
Understand CFDs And How They Work
Many who are new to the world of CFD trading have the following question in mind.
How does CFD trading work?
A CFD is a type of trading system, also called a derivative product, that allows you to trade by investing only a portion of the value of your total trade, also known as trading on margin. You can read more about some CFD trading styles you need to know about to survive on www.dailysquib.co.uk
When trading on margin, also called leveraged trading, it allows for greater access to financial markets in the world. When you trade by making use of your broker’s leverage, what you are essentially doing is putting down a portion of your investment and borrowing the remainder from your broker.
This is how it works: When opening a CFD position, you must select the amount of contracts, also called the trade size, that you’d like to buy or sell. Your profit is determined by how much the market moves in your favour.
Therefore, if you think that the price of a particular asset is going to rise, then you would open a buy position, also called a long position. You profit if the market agrees with you and moves in line with your predictions.
On the other hand, should you think that the price of a particular asset is going to fall, then you would open a sell position, also called a short position. You profit if the market agrees with you and moves in line with your predictions.
Create And Fund An Account
The process of creating a CFD account is quite simple. It will take a couple of minutes and is for the most part plain straightforward. Here’s what you do:
- First you create an account, for which you need an email address and password.
- Afterwards, you would provide proof of your identity, as well as proof of residence, all of which can be done electronically.
- Lastly, after the processing you would fund the account in compliance with how much minimum deposit your broker requires.
One of the most recommended CFD brokers is Plus500 who was also awarded as the best CFD broker of 2020 by Business24-7.ae
Comprise A Trading Plan (Risk Management Strategy)
Now that your account is setup, you need to come up with a trading plan to trade CFDs. A trading plan allows you to identify and trade assets that take into consideration factors such as the investor’s objectives, the timeframe and the tendency to risk.
Although many believe trading plans must be pages long, that is far from the truth. In fact, they can just be a well thought out guideline that considers all necessary factors.
When creating your trading plan, you should consider the following:
- Why you are motivated to trade
- How much time you wish to commit
- Your trading goals
- How you feel regarding the funds you are about to risk
- What risk management strategies you’ve put in place
- Your available funds that you can risk
- What markets you prefer to trade and
- Your preferred trading strategy
Once you have all of that spelled out, especially why you want to start trading and how much time you want to commit to this goal, your goals will be shaped much clearer. Try as best as possible to be realistic about your goals.
If your plan is to only spend a couple of hours per week, then you shouldn’t expect to be making huge sums of money straightaway and within a sort amount of time. When your goals are unrealistic, they will force you to make riskier trades in a short period of time.
It is most important to figure out how much you are willing to risk. It is also important to know what your feelings are towards the risk you are about to take, in order for you to put in place proper strategies for risk management. If you are more prone to being opposed to risk, then you might be more comfortable with lower risk opportunities.
After considering all risk management and the strategies you will execute, it is time to decide on what asset classes you will focus on. As an example, if you’re looking for slow and steady growth, then assets that have high volatility should form a small portion of your portfolio.
It is best, and also highly recommended, to diversity your portfolio across a number of asset classes. This is done in order to lessen risk and to increase good trading opportunities.
A couple of basic techniques and trading strategies include:
Scalping is a system used when you want to make a lot of short-term trades for small and regular profits. This type of trading generates the smallest amount of gains for each successful trade in comparison to other trading systems. It can be very successful if accompanied by extensive technical analysis.
This system makes use of short-term opportunities that are generated by current news developing or trends in the economies that are emerging. This type of trading closes all positions by the end of day.
Trading the Trend
When trading the trend, you want to make a profit by analysing whether an asset will be profitable if it goes in a particular direction, be it up(buy) or down(sell).
Find Trading Opportunities
Since you have a trading plan in place, now you can browse through a platform (which we highly recommend) and choose from over 2000 different financial instruments to trade from. You will find assets across multiple asset classes like forex, commodities, crypto currencies, indices and shares.
Many platforms have news feeds, some live and others not, keeping you updated on all the latest trends in the market. In this way they help you identify opportunities to enter into trades.
Open, Monitor and Close Your First Position
Buy And Sell Prices
When trading binary options, you will always be presented with two prices, which are based on which instrument you chose to trade. These prices are called the bid (buy price) and the offer (sell price). The buy price is always higher than the underlying value, whereas the sell price will be lower. The difference between the two is called the spread, which in many cases counts as the commission the broker earns.
Number of Contracts
When trading CFDs, you can do so using many different contracts. The amount of contracts you’d like to trade is something you have to decide. Every market has its own conditions as to the minimum number of contracts. As an example, Brent Crude oil, requires a lot size of 0.1 contracts in order to enter a trade.
Stops And Limits
You can incorporate a limit order in your trade, which will automatically close a position at a particular profit level, just so that you don’t need to constantly watch the market. Limit orders are also beneficial as they prevent you from holding onto a winning trade for longer than is necessary.
In the same way you can also place stop losses to prevent or minimize the losses you can incur.
A stop loss is the place at which a trade is closed out automatically if the traded price drops below a certain level under the entry point. The two, the stop and limit order, play a very important role as risk management tools.
In order to get protection from trades that are not going your way, and in order to not lose more than you invested in the first place, a margin closeout is employed. To continue keeping positions open, a trader has to meet certain margin requirements. Each of these are different depending on the broker.
A margin requirement is the least amount of funds that must be kept in the margin account, for covering credit risks while trading. This amount of money kept in the account acts as collateral.
When trading, and you are about to exceed the margin requirement, your broker will notify you via a margin call. When you receive a margin call, you would have to either top up your account or close out some of the positions you are holding. If you do not act in a timely manner, the positions will be closed out automatically.