For many beginning traders, one of the greatest challenges they face in trading is learning how to properly trade CFDs. In essence, a forward contract for difference is a derivative, which means that its value is determined by the performance of a specific stock or commodity over a set period.
In this instance, CFDs are the exact equivalent of shares of a company. They can have significant market effects as well as tax implications and are only available in certain countries.
CFD trading is popular with both individual traders and hedge fund managers. About the individual trader, there are two primary methods of CFD trading: direct and off-exchange. In terms of the individual trader, here we consider a win to be when a trader receives positive results from his or her CFD trading, and a drawdown to be when the trader experiences negative results from his or her CFD trading. When a CFD trader executes a bet on an underlying asset, he or she does so by purchasing an option on that particular asset.
As an example, let us look at the CFD ‘ short-term trading platform’ used by the ‘house dealers’ mentioned above. The major difference between this type of CFD trading and regular day trading is that CFDs offer very low margin requirements (typically no more than five percent of the entire value of the contract).
This enables CFD speculators to benefit from the benefits of short-term trading without the more rigorous and potentially higher margin requirements typically associated with day trading. On the other hand, CFD trading south Africa platforms can offer higher gains and losses, so investors should consider their risk tolerance and specific requirements before making a trade.
Another way to learn to speculate on CFDs is to practice with ‘naked’ or leveraged CFDs (also known as CFDs with ‘naked’ margins). These contracts feature higher margins and are only suitable for sophisticated investors who can afford to trade at higher speeds and for longer periods than shorter-term CFDs.
This type of trading requires the highest levels of skill to successfully execute trades. However, the large profit potential is also offset by the high costs involved. For this reason, many CFD speculators prefer naked CFDs, but, at the same time, find it hard to achieve profit levels consistently enough to allow them to maintain their trading positions long enough to see the benefits of such positions.
One way traders can learn to speculate on CFDs is to go short. Going short on CFDs allows the trader to gain a small but significant amount of cash from the price fall in CFDs. Although this technique has limited benefits, it may be worthwhile for CFD speculators who have substantial long positions.
A trader going short can cut his or her losses by selling a CFD before the CFD contracts reach their maturity level and become due for re-issue. This allows the trader to lock in some of the gains from trading CFDs but guarantees that he or she will not lose any money as the prices of the contracts fall.