“CFD trading” is a relatively new form of investment that can prove to be extremely rewarding for many traders, especially those who are making their first steps into the world of financial markets.
Having emerged several decades ago using the latest technologies and scientific breakthroughs in fluid dynamics, CFDs have become increasingly popular among novice and high-frequency traders who use them as a powerful vehicle to gain short term gains.
All forms of CFDs come with stop loss measures which means that even if your trade goes wrong, you will not lose more than you invested initially. This type of risk management ensures that CFD trading has one of the market’s lowest risk/reward ratios.
Liquidity refers to the amount of a financial asset traded regularly. It is usually proportional to the volume being traded and the ease of entering or exiting a trade. Generally, CFDs have one of the highest market liquidity seen in any financial market, so this makes them extremely attractive for those who want their trades executed quickly.
Short trading timeframes
Short trading timeframes mean that CFD traders do not need to invest money for extended periods (i.e., months and years) but can use smaller investment amounts to trade with shorter time horizons (i.e., minutes, hours and days). It means that traders can make significant returns in short timeframes, even with a small budget.
Unlike traditional trading, where you are charged based on the number of shares bought or sold, CFD brokers’ fees are usually included in the spread, which is the difference between the price you purchase an asset and its market price. The result is that even though there may be commissions when opening a new position, any movement after that will incur no additional costs. It helps CFDs remain one of the cheapest forms of investment available today.
Margin trading means trading with money borrowed from your broker, also known as leverage or gearing. This type of trading enables traders to have much higher exposure than their initial capital would typically allow. For example, if you have $1000 and open a trade with 10:1 margin leverage, your exposure will be ten times higher at $10 000. Margin trading can also increase your rate of return because CFD brokers typically charge interest on the money borrowed when the position is kept open overnight.
You are shorting means opening a position against the current market trend. In other words, you expect an asset’s price to fall in the future rather than rise. While this may sound complicated, it is straightforward in practice. For example, when an index such as FTSE is currently trading at 5800 points and has been rising all day, you can short it by opening a position designed to profit if the index falls.
If the FTSE has indeed fallen to 5600 points at your expiry time, then you will make a profit of $1000 – i.e., 100 points x 10 per point = $1000 as opposed to only 5800 – 5600 = 200 points if you bought instead of sold.
Leverage is one of the most important benefits offered by CFD brokers. It refers to their ability to offer traders much bigger returns on small investments than traditional markets would allow for.
This type of leverage comes in two forms:
- Specific leveragemeans that a trader can use less money to open trade than the actual value of the asset he is buying or selling.
- Dynamic leveragerefers to CFD brokers’ ability to adjust their clients’ trading limits based on their risk management policies. It means that even if you use a very high level of specific leverage, your broker can reduce your trading limit if they determine that you are acting irrationally and at an increased risk of losing your initial investment.