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How to trade CFDs

What is CFD trading?

Essentially, a contract for difference (CFD) is a contract between an investor and broker. It enables the trader to speculate on increasing or decreasing prices of the financial markets, such as forex, share, commodities and indices. Once the contract has ended, the two parties will then exchange the difference of the opening and closing price of the specific financial instrument.

Benefits of CFD trading

With CFD trading, you can trade on margin and therefore can sell if you predict the prices will fall, or buy if you speculate that the prices will rise. CFD trading allows you to access the global markets without the need to buy the underlying asset at full value. This gives traders the flexibility to trade falling and rising markets, with the opportunity to hedge risk exposure.

Trading with CFDs means working on contract price differences: they profit or generate losses based on the difference between the purchase price and the selling price of the underlying, multiplied by the number of CFDs.

Margin/leverage notice: due to regulatory requirements the default CFD leverage is set to 1:50. Traders will have the ability to adjust leverage according to their level of experience during the registration process.

As is with other derivatives and investments, CFDs are considered risky and complexed investment products. It is recommended to only invest if you are familiar with trading investing in margin traded investment products and also only invest capital you are willing to lose.

CFD trading strategies

Short-term trading

This type of strategy utilizes minor market price movements. A short-term position can vary between a few seconds, all the way up to several days. Whether you are using a long-term or short-term position you should always consider risk management in order to have a successful trading journey. Overall there are 3 types of short-term strategies you can use to trade CFDs. Namely, scalpers, day traders and swing traders.

Scalping

This type of strategy involves placing a number of trades throughout a trading session with a short-term daily focus. The aim of the scalping strategy is to reap in small profits from small price movements, frequently. It’s important to keep a lookout of the economic calendar in order to catch news releases which can impact a scalp trade.

Swing trading

Swing trading is all about utilizing gains in short-term swings. If you are a swing trader you will focus on catching price movements of highs and lows, typically over a few days to a couple of weeks. Fundamental analysis could also be used with this strategy.

Day trading

There are a number of day trading strategies, but simple price-action based methods are ideal for long-term performance. Typically, day trading is all about liquidating positions before the close of trade, although in positive market conditions, you may hold onto a position over night. Technical analysis is often used by day traders to make decisions, in addition to the upcoming news events.