Is CFD trading easy? (2024)

Trading Contracts for Difference (CFD) allows you to speculate onan asset’s underlying price without actually owning it. This includes shares, indices, commodities, currencies, and more.

A CFDis an agreement in financial derivatives trading where any price differences in the settlement between the open and closing tradesare paid in cash. CFDs do not involve the delivery of actual goods or securities.

So, is CFD trading easy? The answer is no.CFD trading is difficult, even for experienced traders. You should research risk-management techniques in order to reduce this risk as much as possible because CFDs are complicated investment products that involve significant risks.

CFD trading strategies

Read on to learn about 4 different trading strategies that can help you get a better understanding of how the financial markets work as well as what their pros and cons are. All 4 strategies involve trading with leverage meaning that you only need to deposit a part of your transaction in total to get exposure to the markets.

Day trading

A common short-term approach, known as intraday trading, includes initiating and exitingtrades to close the position before the end of the trading day. This is being done to generate revenue through frequent but little price changes. Day traders sometimes concentrate on price movement and technical analysis instead of fundamental issues that may be affecting an asset’s value because this method requires you to diligentlyobserve price charts.

Taking the EUR/USD as an example, its high liquidity and low spreads are 2 appealing factors for short-term traders. Let’s say a trader wants to speculate on this major currency pair. The resistance and support levels from the previous day’s trading might be examined by a day trader to determine potential price movements when these levels are reached.

At the very beginning of the market, day tradersinitiate a CFD trade at the purchase price of 1.1710. To execute a successful day trade, the trader would need to open and cancel otheridenticalpositionsduring the trading day. If the priceclimbedto 1.1750, they might then close out all open positions once the market closes. Consequently, each position would provide multiple gains.

The day trader may choose to closetheposition for a relatively small but reasonable loss if the price, for example, keeps falling below 1.1700 and fails to climb back up above the initial purchase price. This is an unsuccessful example of a CFD trade.

Trading the news

Another day trading strategy isnews trading, which entails being aware of recent economic developments and upcoming market sentiment. News traders must havethe ability to quickly assess potential trading opportunities and have good decision-making abilities. This is a very helpful strategy for turbulent markets that respond swiftly to outside influences like oil, indices, individual companies, and currencies.

Let’s use the 2016 Brexit (UK withdrawal from the European Union) referendum as an example.

Assume that a trader was trying to profit from changing GBP values due to the controversialnature of the referendum. Let’s say the GBP Index wastrading at a purchase or sell price of 1,007/1,006 before the first exit poll wasmade public. The exit poll wasreleased and revealed that a greater proportion of voters are choosing to leave, leading the trader to believe that the value of the pound sterling would decrease rather than increase.

The trader chooses to sell the assetat the sale price of 1,006 and open a short CFD position.The speculation came true, and as a result of the surprise of unexpected news, the value of the pound fell sharply about other currencies.

However, keep in mind that following a news release, prices may not necessarily follow the same path. For instance, after the Brexit result, the value of the pound sterling fell dramatically, but it soon began to rise, demonstrating that market reactions may change and go in a completely other way. Consequently, a news trading technique is frequently only used in the short term.

Hedging

An approach that assists traders in balancing risk throughout their trading portfolio is financial hedging. Currency pair trading and usingderivatives, such as forward contracts, are two examples of successful hedging techniques. You can also use haven assets as a hedge, such asgold, specific currencies, bonds from governments,and defensive equities because they are thought to be less vulnerable to unfavourable market fluctuations than other financial instruments.

Let’s assume that an investor owns 1,000 shares of Tesla on an independent trading stocks account and is concerned that the stock may decline after the company reportsweak results. The traderchooses to use a CFD trading account to short-sell1,000 Tesla shares in the hopes that any losses that occur on the equity position would be compensated by a profitable short sale.

Suppose that Tesla’s stock price decreases by 10% as anticipated. Even if the value of the trader’s account has decreased, the trader still made a 10% profit on his CFD transaction and has the option to buy the stock again at a reduced price if he/sheso chooses. This is an example of a successful hedging technique.

Position trading

Using a buy-and-hold strategy, as you would in investing, is comparable to position trading. By ignoring small price movements and concentrating on long-term patterns and overall movement, position traders may hold tradesfor months or even years. These traders often depend on fundamental analytical indicators, such as economic developments and prior price patterns.

Consider a trader who wants to keep his/herPayPal stock for an extended period because he/she believes in its worth and thatit will rise gradually over time. This traderspends $275 to purchase several CFD units for PayPal. Position traders don’t need to do technical analysis or keep an eye on price charts all the time but ratherchoose to conduct corporate analysis on occasion to make sure the stock continues to move up.

The trader may accomplish this by figuring outP/E ratios, speculating onearnings, and examining dividend information that the business provides in its accounts payable. Somemonths later, PayPal is already trading for $330. The trader may now close out his position with a profit of $55 if he/sheis satisfied with this amount.

Just like position traders, you will pay holding charges while holding CFD positions overnight. If you own shares for a long time, you may also be charged commission costs.

Trading tips in CFD trading

• Create a trading strategy, then stick to it.
• Before entering a position, research the market you want to trade on or are interested in.
• Be aware of your restrictions when you begin to trade.
• Improve your general understanding of derivative products and CFDs.
• Determine how much money you are willing to put at stake.
• Keep an eye on your open trades using both technical &fundamental analysis.

CFDs and risk management

Leverage, which is necessary for CFD trading, enables you to establish a much larger position using borrowed money to increase your exposure to the financial markets. Only a small portion of the total deal value must be deposited. This is a benefit of CFD trading, but it may also be viewed as a risk because it increases the likelihood of financial loss.

When taking a buy or sell CFD position, many traders want to add risk-management limitations.Depending on the amount of risk you wish to assume, you have the choice of standard, trailing, or guaranteed stop-loss orders. Consider position size as an alternative to trying to open a CFD position with an unreasonable amount of units. This will help you determine how much of your overall account value is at stake with each transaction.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.