The use of Contracts for Differences (CFDs) continues to be trending among retail traders, as these financial derivatives are ideal when market volatility is high and valuations have a directional bias. Understanding what CFDs are and some of the main threads associated with them is not difficult, even when it comes to people who are just starting out in the industry.
The basics of CFDs
People will hear about the stock markets, FOREX or commodities in the media. These are financial assets with a floating value, encouraging speculation. Retail traders and institutions around the world engage in these markets on a daily basis, depending on changing economic conditions, political events, monetary policy announcements, and other variables that may impact markets. valuations.
Contracts for Difference (CFDs) are derivative products that track the exact price of the underlying assets (currency pairs, stocks, indices, commodities, bonds, ETFs, etc.), allowing users to profit from price movements. , without any property.
Margin of negociation
An important quality of CFD trading is the use of leverage (margin trading), which allows traders to efficiently borrow funds from their brokerage to place larger orders in the open market. As pointed out in many educational resources available on the web, leverage is a double-edged sword because it can increase both profits and losses.
Every trader should be aware of the risks involved and learn one of the most important skills professional traders master: risk management.
Risk management is a series of tasks that help traders manage their exposure to the market. Some of the most popular tools used are stop loss and take profit. Any trader wishing to approach the markets in a professional manner should place at least one stop loss on every trade, as only then will the decline be always under control.
For those who are not yet used to placing orders and managing risk, a MT4 demo account can help them learn, without having to invest real money in the process. This is one of the most overlooked steps, but it makes a big difference between traders who consistently outperform and those who are unable to weather their losses.
Starting to trade online using CFDs is now available to the general public, but few understand that getting involved in the financial markets is like any other profession, requiring a lot of study, learning from mistakes and developing. a flexible trading strategy, adapting to different circumstances.
Short term trading – the right approach?
When trading with CFDs, traders can profit from short-term price movements, due to lower costs (spreads and swaps). This is an appropriate approach, given that financial markets had been very uncertain over the past year, mainly due to the COVID-19 pandemic and its effects.
Since no one knows where the markets are heading in the long term, a step-by-step approach is needed. With an abundance of CFDs based on the most popular asset classes, it is possible to profit from financial events causing price fluctuations, even from the comfort of one’s seat, using a PC or a basic laptop.
By the editor.