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A CFD or contract for difference is a financial product that allows a trader to speculate on asset classed without owning a portion of the underlying asset. A CFD trade is not an investment but high-risk speculation that carries the risk of losing all your money very fast.
You can make a considerable return on your money on the flip side than if you invested in physical stock. CFD also carries the advantage of no liability for stamp duty, which is a certain percentage of its value. Most speculators prefer CFDs to buy physical stock as the costs are much lower, but the risks go up if they use leverage.
CFD brokers offer you facilities to trade CFDs and other financial markets. Most brokerage firms offer clients the MT4 platform alongside their proprietary platforms to enable them to trade better. To trade CFDs, here are some rules to follow:
Cutting your losses and running with your wins takes a lot of discipline. One of the reasons many traders lose money while trading is because they are too quick to lock in profits. Trading in CFDs is a game with numbers, and even the top hedge fund managers only nail it half the time.
The market relies on trends and reversions, with technical analysis playing a considerable role in long and short term CFD trading. You can do this by setting up an automated stop loss.
If you have some money, you should not put the whole amount into a single trade. If it is a sure winner, that is an advantage, but if it is a loss, you will be in trouble and cannot enter any new positions when they arise.
If there is a short-term market, you will get a margin call, and you have to close your positions since you cannot afford to cover the variation margin.
CFD brokers have the advantage of providing a facility to make profits when the market dips. This means you can hold diverse positions but remain market neutral. The most important thing you need to remember is that a profitable CFD trader does not open huge single positions and pray for the best.
Trading over the counter or OTC products such as CFDs is risky if you are operating on margins, where you can quickly lose more than the initial sum deposit. One of the hidden dangers of CFD includes:
When you borrow money from a bank, there is interest charged. When you are trading in CFDs, you are also borrowing, and there is an interest charged. If you have a large account, these rates are negotiable. Overnight financing is a fee you pay for holding a short-term trading position overnight.
When trading CFD, you are essentially using leverage and being lent the cash required to open the position, aside from the initial deposit. To keep that position open after the cut-off time, interest will be charged to your account to include the cost of funding the position overnight and the admin fee.
Overnight funding interest charges reflect on your account as separate transactions and do not affect your profits or losses. You automatically receive a statement that contains all your trades and any associated charges via your email at the end of every trading day.
Trading in CFD is a highly risky venture, yet profitable if you know how to play your cards right by knowing when to cut your losses, not overtrading, and holding diversified positions. In the beginning, before you get the hang of it, you are likely to make some mistakes, but the trick is to have a trading strategy and follow it to the letter. You also need to realize that making profits does not come overnight, and losses are part of the CFD journey.