5 things to consider before you begin CFD trading
It is highly likely, if you’re reading this, that you’re considering joining the vast, growing number of global traders using contracts for difference (CFDs). This specific form of trading has grown substantially over the years, with millions of CFD trades happening each day, from investors all over the world.
However, this form of trading, like any other, requires many different considerations before you begin your trading journey, in order to have the optimal experience.
Thus, before you start CFD trading, we highly suggest looking over these top five things to consider, which will significantly help you get the most out of your trading journey.
How do CFDs differ from traditional trading?
The first thing to consider before you start trading CFDs, is how CFDs work in comparison to the traditional form of trading. Understanding the entire process of CFD trading is vital for beginners, because it gives you a firm foundation on which to start.
CFD trading involves the buying of contracts (units), as opposed to buying the asset itself. Essentially, you are predicting the price movement of the asset, instead of owning the underlying asset.
Your speculation on the price movements of an asset, and your position – whether long (buy) or short (sell) – will determine whether you have made a profit or a loss. For instance, a long position on an asset that rises in value will produce a profit, and vice versa, its decrease in value would incur losses.
Considering the differences in CFD trading compared to traditional trading, will help you approach your trades correctly, and also allow you to consider if CFD trading is the best option for you.
What costs come with CFD trading?
The next thing to consider is the costs of CFD trading. With CFDs, you are required to pay the spread of an asset, which is the difference between the buy (offer) and sell (bid) price.
The spread is key to determining the price of the financial derivatives. Every asset will have a quoted price on the market, and then a price which you can buy and sell at. These tend to be slightly above (buy price) and below (sell price) the market price, and will differ between trading platforms. To open a position, you must first pay this difference.
Different platforms will aim to offer competitive spreads. The tighter the spread, the more enticing the trade. Sturdy assets will have tighter spreads, but as the market becomes more volatile, the spread will become wider, meaning more risk and capital is needed.
On top of paying the spread, you may also be required to pay additional fees, including commissions and swap charges. These are all essential considerations for trading CFDs.
Understanding the cost of CFD trading can help you adequately prepare for the necessary expenses, and give you an idea of how much you will need to acquire from each trade to profit.
Which trading platform will you use?
Another important thing to consider before trading CFDs, is the trading platform you wish to use. Trading platforms are at the heart of your trading journey, since they are the place where your trades, and all things related, can be found.
With there being such a wide variety of trading platforms available, you need to ensure that you choose one that’s perfect for you. For example, certain platforms offer expert guidance on how to effectively execute your trades, as well as giving you a range of features to aid you in your trading.
Therefore, be sure to thoroughly consider your platform choice, as this can offer you a significantly better head-start in your trading experience with CFDs.
How will you effectively plan and manage your trades?
Before trading with CFDs, it is also important to consider how you will manage your trades and create an appropriate trading plan.
Trading plans and management are key components in a successful trading journey, since they allow you to make the most accurate trading decisions, whilst also being aware of how your trades are performing.
For instance, you could conduct extensive research into a particular asset, to help you decide whether or not you should trade it, and what position you should open. Once this has been done, you can have alerts set up on your platform to inform you of the price movements, so you have the best chance of closing the position in a profitable state.
Having a detailed idea of your trade plans and management, is essential for any new CFD trader.
What type of markets will you trade in?
The final thing to consider before trading CFDs, is the type of markets you wish to trade in. CFDs can be traded in a variety of different markets, each having a range of different assets.
For instance, you may wish to open a CFD position in the foreign exchange (forex) market. This is a highly lucrative market that deals with the exchanging of currency pairs, to produce a profit from their value fluctuations.
Considering the markets you wish to trade in, can help you diversify your CFD trading portfolio, and ensure you have the best chance of making profitable trades in each market.
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Make these five considerations before starting your own CFD trading journey, and you will most certainly be equipped to have the best possible trading experience, and the highest chance of profit.