CFD, which stands for “contract for difference,” is a form of derivative trading. With CFD trading, you speculate on the rising or falling prices of fast-moving global markets.
Let’s say you’ve decided on CFD trading as one of the financial vehicles you’ll use to raise the money you need to expand or launch your business. You’ve done your research, and you’ve chosen the market you’ll focus your CFD trading efforts on. You know that market inside and out, and your quantitative and qualitative analysis is at a high standard. You’re ready to start trading.
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Select a Broker
The first thing you need to do is find a reputable broker. There’s a wide variety of brokers out there, and it’s worth shopping around. Not only do you want to get the best deal possible, you also want to choose the most reliable broker you can find. Reach out to your network to get their views on different brokers. Also, spend some time looking over financial forums and studying the comparison charts you’ll find online. This will give you a better picture of the brokers that are out there, and which ones you can trust with your money.
Place a Trade
Whatever your broker, the process for placing CFD trades is fairly similar. Using your investment plan, you should have already chosen a market, whether to buy or sell, selected your trade size, and chosen a stop loss point. Once you’ve found your trade and confirmed the details, you should be able to place the trade.
Your broker should allow you to monitor your trade and see your profits and losses. This tracker is the most important tool in your arsenal when it comes to managing your position. It might seem like it goes without saying, but it is important to check the performance of your trade on a regular basis, even if it is a position you intend to hold for a long time.
The second most important tool is the aforementioned stop loss. A stop loss order is simply a mechanism that stops you losing too much money if things go badly. It’s an order to close your position at a certain price if it moves too far against you. If you’ve got experience trading other financial vehicles, you should already be familiar with the stop loss order.
Trading without a sensible stop loss puts you at risk of losing a significant amount of money on a bad trade.
Another important tool, and one you will already be familiar with if you have previous investment experience, is the limit order. A limit order gives an instruction to buy at or below the current market price, and sell at or above the market price.
What this means is that you will never pay more than the specified price for a CFD. Neither will you ever sell lower, meaning that you can enter the market at a better price than is currently displayed.
For instance, if you were looking at a stock which was currently $50-52, you could place a limit order to buy at $48. Or you could set it to sell at $54. A limit order can be set to be “good for the day.” In that case, if the trade does not take place within the day, the limit order is cancelled. Or, it can be set to be “good until cancelled.”
There is one thing to remember with limit orders. That is, that the broker might not be able to find a corresponding party for the deal. Therefore, unlike market orders, the deal might not necessarily go through.
Ultimately, when it comes to CFD trading, you should know your market and have a clear investment plan. You should also select your broker with care. Additionally, be aware of stop loss and limit orders to ensure greater control over your investments. Most of all, have fun!