According to one of the top financial advisors at Olsson Capital, contract for difference (CFD) is one of the most traded financial markets. It allows traders to trade high valued assets without having to own the real assets. The trader trades on the price changes. It is referred to as contract for difference because it is usually a contract between the trader and the broker and it involves the price difference.
CFDs markets are the second most liquid markets after Forex and majority of financial market traders trade CFDs. The only charges associated with CFDs trading are spreads, holding costs and Commissions. Although it is a profitable business, CFD trading also has huge risks and a trader must be careful when trading. Below are four tips on trading CFDs online successfully:
Register for a demo account
A demo account is where you practice trading. Whenever you are choosing a CFD broker, you should ensure that the broker provides a demo account. You should avoid going for brokers with no demo account no matter how professional you claim to be. With the demo account, you will be able to learn how your broker operates and also learn how to execute different types of trades. Most traders often think that demo accounts are meant for novice traders,but that is not the case. With that said, even experienced trader use demo accounts. Most brokers allow their clients to open as many demo accounts as possible. A trader can open a new account should he or she burns all the virtual cash in the demo account.
You may wonder how experienced CFDs traders use the demo account. But every trader must test any trading tool that they wish to use in the real trading account. Every technical indicator should first be tested in the demo account. This is where the trader should practice how to use the technical indicator and test whether it is worth using. If it is not profitable, it should not be used in the real trading account.
Also, if the trader wishes to use expert advisors, they should first test them in the demo account. The trading EA should be tested for a substantial period to ensure that it qualifies being trusted with the real money in the real trading account. The demo account is also the place where the trader first tries any trading strategy to find out if the strategy works or not. If the strategy is profitable in the demo account, the trader can use it to trade on the real trading account. The beauty of having a demo account is that any losses incurred in this account are not real since the money is virtual. It helps shield the real account from losses.
Choose a regulated CFD broker
Choosing a broker is always the most crucial point in any financial trading. There are very many CFDs trading brokers online the trader must go through the available information about the brokers to choose the best-suited broker. The brokers offer different services and it will depend on how you want your trading experience to be.However, a trader should try and choose a regulated broker. You should look for the regulation information on the official website of the broker since regulated brokers usually display this information freely on their webpage. The regulation helps in guaranteeing the safety of the deposited funds. In case of queries, the trader can report the broker to the regulatory authority with whom the broker is registered with.
Go for a higher leverage
One of the greatest advantages of CFDs trading is margin trading. This means that a trader can open a position which is valued more than they deposit for the position. The broker kind of lends the trader some trading funds to keep the order in the market. The broker gives the trader some leverage. The larger the leverage, the lesser the margin required to place an order and the larger the profit margins. However, you should remember that this is two-sided and in case of a loss, the loss will also be multiplied by the same factor.
Use risk management strategies whenever you are trading
CFD trading is extremely risky and a trader should always ensure that they use strategies which will best help to evade the risks of making losses. Such practices include use of stop levels, following your trading strategy and testing everything on the demo account before using the real trading account.