The Forex market is the largest market in the world. It offers a lot of amazing opportunities to make money every day. However, utilizing those opportunities can be really daunting. Sad stories of Forex traders who only end up being stripped of their monies abound.
You might already be looking for alternatives to it if you have already known that. But there is one that can give you more of the benefits of Forex and less of its disadvantages. It is CFDs.
What are CFDs?
So, what are CFDs? CFDs, contracts for difference, are a popular derivative instrument. Derivatives are those financial products (other examples are options and warrants) that derive their value from underlying assets such as commodity, currency, and stocks. As a result, there are as many as derivative products as there are financial instruments to trade.
CFDs have become widely adopted financial products. However, controversies still trail them. In fact, some countries have banned their trading because of the tendency of their traders to over-leverage them. Nevertheless, you can use them to profit with many financial markets without having to directly trade in them.
So, how do you trade CFDs? Now, you will find out. Like earlier stated, there are CFDs on a wide range of financial assets. In fact, more CFDs are traded on stock market indices than on any other financial asset. However, they can also be traded on Forex, too. With CFDs on currency pairs, you will not have to buy or sell the underlying assets themselves.
Instead, depending on whether you think the prices of the pairs you would have loved to trade will either go up or down, you just have to buy or sell a specific number of units of the CFDs. For every point that the trade goes in your anticipated direction, you make multiple ticks in return. On the other hand, if it goes against you, you lose.
However, before you ever lift your fingers to take that CFD trade, do your analyses first.
Every financial instrument has specific fundamental factors that affect its price. Therefore, before you trade a Forex pair, you should be aware of those economic factors that it is highly susceptible to. Then, analyze them.
The news that can affect crude oil can be different from that that will affect a particular precious metal. However, it is not that simple as it has been found that many Forex markets are actually correlated. Analyzing fundamentals takes a lot of time and efforts but it always pays off in the end.
Then, there is technical analysis. This is another method of analysis that you should apply in your CFD trading career. It is all about analyzing previous price patterns in order to predict price behavior. This is done using the information on charts.
Other technical analysis tools you can employ are patterns, retracements, and indicators. There are different technical indicators to tell you different kinds of information about the market. Learn to use them. Importantly, you can combine both fundamental analysis and technical analysis to approach your trading.
Benefits of CFDs
First, CFDs derive their value largely from the fact that they are a derivative. That is, with them, traders do not have to trade the underlying assets directly. CFDs have proved to be a cheaper arrangement this way.
Also, CFDs, being highly leveraged, give the advantage of margin trading. Margin trading is a provision that allows traders to deposit only a small percentage of the amount required for the trade they want to take. With as little as $200, for example, margin can enable you to control a position that is as much as $200,000 in worth.
Sadly, the advantage of margin trading is also the undoing of CFDs. In fact, it is the major reason they still continue to come under attack from some quarters of the investing public and regulatory agencies. Because of margin, CFDs can easily strip unknowing traders of their funds.
In some jurisdictions, CFDs also confer tax efficiency advantage. Finally, because you can either short or long them, they can help you profit from both the reduction and the increase in the prices of the assets they underlie, making them a highly-efficient speculative product
Finally, before you trade CFDs, also confirm the specifications of each contract with your broker. These include commission, spread, leverage, stop-out price, the maximum and the minimum number of contracts that can be traded, and other similar conditions. It is important you note that these specifications vary from broker to broker.
CFDs are a highly leveraged and unique instrument to trade. Hence, you should pay attention to the conditions and the associated fees. As a result, also, always ensure that you do not overleverage your positions when you trade. Else, use a forex signal service that will boost your chances for success. 1000pip Builder is that and you should subscribe to their signals.