As the world’s financial markets have evolved, we’ve seen a growing range of investment vehicles emerge to the benefit of traders. These include so-called ‘contracts for difference’ (CFDs), which offer a number of tangible advantages for investors in some marketplaces.
These include the foreign exchange, which is a vast global market that currently sees an estimated $6.6 trillion traded every single day. Make no mistake; CFD trading is ideally suited to the derivative-based forex market, particularly for those of you who wish to minimise your risk.
In this post, we’ll appraise CFD trading in further detail, while asking what other markets it’s compatible with in the digital age?
What is CFD Trading?
In simple terms, a CFD is a contract set up between two parties in a specific market, namely a ‘buyer’ and a ‘seller’.
More specifically, the terms of a typical CFD will dictate that the buyer must pay the seller the difference between the real-time value of an asset and its value at the time the contract was made. If the difference is negative, the seller will be required to pay the difference to the buyer.
In this respect, CFD trades are simple securities calculated by an asset’s price movement between trade entry and exit, with no other factors having a direct impact on the associated value proposition.
This brings us onto the primary benefit of CFD trading, as it offers investors an opportunity to speculate about real-time price movements in their chosen market, without them being required to own the underlying asset or financial instrument.
What Markets Can CFD Trading be Deployed in?
In the modern marketplace, the contract is usually agreed between a client and their broker, while CFD trading is agile enough to be applied in a number of financial marketplaces.
Forex remains the most popular market for CFD trading, with this entity involving the buying and selling of currencies for profit. As a derivative asset class, currencies can easily be traded without assuming ownership of the underlying instrument, and in this respect, it has a great deal in common with the principles of CFD trading.
Not only this, but CFD also allows traders to take a more relaxed approach to forex trading, by enabling them to speculate on currency value rather than constantly trading contrasting pairs.
The commodities market is also a fair active one from the perspective of CFD trading, particularly in a year where some commodities have performed considerably better than stocks and most major currencies.
The Top CFD Trading Tips
If you’re going to engage in CFD trading in the forex or similar market, there are a few key roles that you should adhere to.
Firstly, we’d recommend using your broker’s demo account before speculating with your hard-earned capital. This provides you with access to a simulated real-time market of your choosing, enabling you to test and hone your trading strategy over a period of weeks and months.
Secondly, it’s also crucial to leverage stop-loss orders successfully, particularly when trading currencies. These crucial risk management measures can automatically close positions once they’ve incurred a predetermined level of loss, helping to cap your losses and minimise the impact of ill-judged CFD trades.
This is particularly important in volatile and changeable markets, while it should be noted that the forex market is open for 24 hours each day and spread across three geographical trading sessions.