CFD trading – Is it worth trying?

Written by John Turnbull, content specialist, on behalf of Exness.

In this article, we will take a closer look at what CFD trading is, what notions you need to know before starting trading, what CFD advantages and benefits are.

Moreover we will focus on a few trading strategies, tips, and ideas that you can use to start trading more confidently. Our CFD Trading Guide will provide you with the basic knowledge you can use to build a more comprehensive and detailed trading strategy.

What is CFD?

If you are interested in CFD trading, you’ve probably already heard about this abbreviation. 

CFD stands for Contract For Difference, and is an investment tool that traders in particular use. It allows investors to monetise price changes without owning the underlying asset. With CFDs, you have the opportunity to trade in many more markets than usual.

But just because you have more options, it does not mean you are going to make more money. 

The contract is concluded between the trader and the broker or the market maker. It exists in equal scope for both the buy and sell orders. Different brokers can have different rules for deposits and withdrawals depending on the payment system the trader uses. Most traders prefer bank cards. One of the leading market makers Exness has set the lowest deposit requirement for the bank card in comparison to other payment systems. Exness minimum deposit for the bank card is just $3.

CFD trading for beginners

As we have mentioned with a CFD, one can buy and sell, without owning the underlying asset.

For example:

Instead of buying a Netflix stock, you can buy a CFD for Netflix. Here you enter into an agreement with your trading platform that issues the CFD.

This is a CFD for Netflix because the CFD follows Netflix’s market price during the period in which the CFD (contract) is in effect.

Facts about CFD

  • A CFD (Contract for Difference) is an agreement between an investor and a trading platform. The trading platform is also called a CFD broker.
  • You can both long and short a CFD. You can thus both invest with the expectation that the value of the underlying asset increases or decreases. If you buy, you expect the underlying asset to rise. If you sell, you expect it to fall.
  • The CFD follows an asset. A CFD emulates an underlying asset, which is why you can buy a “Netflix CFD”, for example.
  • Investment types. CFDs are used in many different types of investments, including stocks, ETFs, FOREX, commodities, cryptocurrencies and more.
  • CFD trading is generally associated with certain risks. Therefore, you should consider whether you really understand what a CFD is before you start investing in them.

Benefits of CFDs

It may seem strange to want to buy a CFD, rather than buying the asset. The following benefits explain why CFD trading has become so popular with the traders.

  • You can short stocks and other assets
  • You can trade for smaller amounts
  • You have access to many markets

Let’s have a deeper look at each advantage!

You can short stocks and other assets

To short means to trade with an expectation that the underlying asset will fall in value. As a trader, this means you can make money even if the stock market is down. This applies to all CFD markets, not just the stock market.

You can trade for smaller amounts

A CFD is a leveraged tool. This means that you can control a larger portion of the asset without investing the full amount.

For instance:

You buy a Netflix CFD for $ 1 000 with a margin of 20 percent. You can now buy up to $5 000 in Netflix shares.

20 percent of $5 000 = $ 1 000.

The different trading platforms explain leverage differently. In some places you will see the word margin, while others will use leverage.

In the example of Netflix, we have a margin of 20 percent or a leverage of x5.

$1 000 x 5 = $5 000.

We have chosen a leverage of x5 and thus have an exposure of $5 000, even if we only trade for $1 000. This means that if our investment increases by 2 percent, we have not only earned 2 percent of $1 000, but 2 percent of $5 000.

$1 000 times 2 percent = $20.

$5 000 times 2 percent = $100.

So you can make much more money by trading leveraged positions.

You have access to many markets

CFD trading makes it possible to trade in markets that are not normally readily available.

  • Raw materials
  • Agriculture
  • Metals
  • Cryptocurrencies

You can trade in these markets and many others through a single CFD account. And that is very convenient.

CFD terms and notions

Main terms and notions you need to know if you’ve taken a decision to start trading with CFD. 

  • Pip value
  • Spread
  • Leverage
  • Margin
  • Equity
  • Swap

Spread is actually the difference between the buying (ask) and selling (bid) prices. Spread is the main source of profits for the market makers.

CFD trading strategies and tips for beginners

If you are a beginner in CFD trading, it may be a good idea to proceed slowly with a relatively simple trading strategy that focuses on your current knowledge and understanding of markets.

By analysing your early trading decisions and by assessing what works and doesn’t work, you can refine and improve your trading plan as your knowledge of markets and your confidence grows.

Analysis, research and development of market insight can help a lot when trying to build up a trading strategy. When it comes to financial trading, market research and understanding how to apply it as part of a broader trading strategy is one of the most effective tools at your disposal.

Market information and understanding are crucial to making good trading decisions, and you should thoroughly weigh all your potential trading ideas against the insights and trends that your research results in.

Different types of trading analysis 

Market research can be divided into two main categories: 

  1. Technical and,
  2. Fundamental analysis. 

Technical analysts use tools such as indicators to track market movements and compare trends and chart patterns.

Investors who use fundamental analysis to guide them in their trading decisions generally look at the big picture of the “real world” when it comes to analysing the events and factors that influence price movements.

Fundamental analysts look at things like disclosures of economic data, decisions by central banks, changes in supply and demand, important policy speeches, voices and decisions, and broader market events that can provoke volatility. To take a closer look at the types of events that affect specific asset classes, visit our individual market pages for more information.

A good place to start if you want to follow events such as regular releases of financial data is a comprehensive financial calendar that can help you anticipate things, including decisions by central banks, reports from major corporations, and recent employment figures.

Develop your CFD strategy

When you start trading CFDs, your trading strategy does not have to be overly complicated or extensive. It can actually be an advantage just to start with a strong trading idea and the right reasons to enter the market, but at the same time have a clear exit strategy.

It is important to plan your trade and you can learn a lot from analysing your own performance.

  1. First choose a market you want to trade on.
  2. Decide what order to open: buy or sell. Choose the button “buy” if you feel the price will increase in value, and click on the “sell” button, if you feel the market will fall and the price will decrease in value. Try to follow the trend.
  3. Select the trade size, it means you should decide how many CFDs you’d like to trade.
  4. It’s better to add a stop loss to protect yourself from considerable losses. 
  5. Monitor the market changes and close your trading position.

Professional CFD trading strategies

  • Hedging Strategy
  • Pairs Trading Strategy 
  • Swing Trading Strategy 
  • Technical Trading – Advanced Trading Strategy
  • Scalping Strategy
  • Arbitrage Trading
  • Day Trading
  • Positional Trading
  • Momentum Trading – A Coherent Trading Strategy

These strategies can be divided into two main groups: short and long term strategies.

Helpful Tips about CFD strategy for beginners

Try to keep a diary of your CFD trades, which includes the following important trader information:

  • Really acquired gain / loss
  • Duration of the trade
  • Initial profit target / loss level
  • The rationale behind opening the store based on research
  • Trade size and trade direction.

The more information you can write down, the better it is, as it will give you more data points if in the future you want to assess a potential trading opportunity by holding it up against a trade having similar characteristics. Remember to start small and then you can also diversify your trading.

[Image – Photo by Behnam Norouzi on Unsplash]


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