CFD trading in 2021: What you should know before you begin
The term CFDs, which stands for contracts for difference, offers many opportunities to earn money. As with every type of trading, it’s important to be fully prepared and possess the right skills so that it becomes possible to make successful trades. If you are a complete beginner in this area, familiarizing yourself with the basic ideas of CFD trading should be your priority. Here are some fundamental things you should know before starting to trade in 2021.
What is CFD trading all about?
To put it simply, CFD trading is the process of selling or buying contracts for difference through a certain online provider. When engaging in CFD trading, traders make predictions on whether a particular asset will fall or increase its price. The profit that you are able to receive is fully dependent on whether the prediction you made has been correct. Nowadays, accessing online CFD trading is easy because of the variety of platforms available.
Steps you should take when trading
When getting involved in CFD trading, the basic tasks you have to complete include the following:
- Selecting a market
The best recommendation is to start with a market that you have plenty of knowledge about. At the moment, you have an opportunity to choose from an abundance of individual markets that include commodities, currencies, and more. You can use a search function on different platforms to find exactly what you need.
- Decide if you will sell or buy
In CFD trading, buying means going long, while selling is going short. You can see the sell and buy prices on the platform that you use for trading. The instrument you use determines the price of your CFD. If you predict a market decline, your decision should be to sell and if there is an increase – to buy.
- Select the CFDs size
When you get involved in CFD trading, there is an opportunity to control your investment size. At the same time, there is a set minimum amount depending on a particular asset. You will usually see lower margin requirements with well-traded stocks. With different volatile assets, you can expect margin requirements to be high.
- Set limits
Managing risks is an important part of the trading process. You obviously want to minimize your losses, which is why using limits is so important for beginners. It’s possible to set a stop loss so that the trade is closed the moment the market reaches a specific level. You can create a trading plan and use a trading bot that can complete instructions for you. As a result, you don’t have to monitor every step.
- Close positions
You can see how profits increase or decrease with the market price in real-time. At any moment, you can close your trades or add a new one. Your trade can be closed automatically if you have a limit order or stop loss activated, or you can close it on your own.
CFD trading recommendations
You will be able to come up with the best strategies with experience, but there are some general recommendations that you may find useful:
- Write down important information
The good idea is to keep a journal where you can enter essential details, such as price, exit points, instrument, profit/loss, time, and more. When you have all the information written down, you can analyze it later and notice patterns that lead to success.
- Use demo accounts
Another recommendation is to test strategies using a demo account, especially when you are a beginner. A demo account can help you get familiar with CFD trading as a whole, but it is also a good way to get used to a specific trading platform.
- Continue learning
Right now, there are many books, courses, blogs, and other sources of information regarding CFD trading. It’s important to keep up with the changes in the financial market and also learn about trading strategies, which is a process that never stops. Luckily, a lot of information is easily accessible and often free.
- Always start small
Beginners are always recommended to start small. When you are at the start of your journey, it is often advised to leverage under 3 times your account size. Your exposures should be quite low when compared to the capital you have when you are gaining more experience.
Profitable trading requires preparation
Just like with everything, CFD trading requires some patience and practice. It is always advisable that complete beginners start by creating a demo account and practicing all the different strategies there. Once you feel confident enough, you can easily transition to trading on real platforms.
Have you ever tried CFD trading? If not, are you interested in giving it a try? Tell us what you think about this type of trading in the comments below. Share this article with those who may benefit from it.