CFD stands for Contract of Difference. Put simply this is the contract between a broker and an investor. It allows the investor to speculate an increase or decrease in the financial markets and the selected instruments. Once the contract has been closed then the two parties will exchange the difference between the opening and closing price.
Why trade CFDs?
There are many advantages to trading CFDs. One of the major ones is that you can trade on margin. This allows traders to hedge risk exposure by speculating on increasing or decreasing prices. This is important because you don’t have to purchase the asset at full value. This doesn’t mean trading CFDs doesn’t come with a risk. Traders must be aware of the risks and understand margin-traded investments. Leverage is set by the regulatory body at 1:50 by default. Depending on trader experience you will have the opportunity to change this leverage. Trading CFDs give traders more flexibility and diversity when trading the markets.
CFD Trading Strategies
There are various CFD Trading Strategies that can be broken down :
Short-term trading uses small market price movements. There are 3 main types of short-term trading: Scalping, Day Trading and Swing Trading. These trades can consist of trades that will take only a few seconds and trades that could take a few days. Whatever trading route you decide to take, whether it be long or short term, there are always risks. These need to be assessed and proper research needs to be carried out before making a trade.
Day traders look to liquidate positions at the close of trade. Day trading can be used for long-term performance through price action-based methods. For this type of trading, market analysis and information on news and events need to be monitored before making a decision. Put simply it is the buying and selling of the same security in a margin account within the same day.
Scalping involves profiting off of small price changes. A number of trades are put throughout a trading session and focus on short-term daily trades. When scalping the trader is looking to make frequent small profits off of small price changes. For this reason, it is important to look for new market information from the economic calendar in order to best carry out their trading decisions.
Swing trading involves trades that will take days or several weeks to profit from a predicted price move. Swing trading can also be used to utilize profits in short-term swings. This type of trading needs to focus on fundamental analysis and try to catch price changes at highs and lows.
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