CFD Trading

Contract for difference (CFD) trading first emerged in the early 1990s and has since become a firmly established concept in trading circles. It is often seen as high risk compared to other strategies, and as such most successful CFD traders are experienced individuals backed up by a wealth of expertise and acumen in the field.

CFD trading is where a buyer and a seller enter an agreement to exchange the difference between the value of an asset at the time the contract opens and when it closes.

CFD traders do not own the underlying asset, which is a key point of difference from traditional share trading. Instead, traders are essentially speculating on an asset’s price either rising or falling.

CFD trading is done on margin, meaning traders only have to put up a percentage of the position’s value rather than its entire worth. If a trader thinks an asset’s value will rise, they can open a buy position. If their prediction proves correct, they can choose to close the contract and sell, thus making a profit. By contrast, if the price falls below what they paid, they need to make a decision over whether to close the contract and accept their losses or hold and see if the value recovers.

On the other hand, if a trader believes an asset’s price is due to fall, they can open a sell position. If the market trends as they forecast it would, they’ll make a profit. But if the asset’s value confounds their expectations and rises, they will stand to make a loss.

Before you start, it’s vital that you have a deep, extensive understanding of what CFD trading is. Most successful CFD traders are vastly experienced operators with well-formed strategies that have been honed over a number of years, so it’s important to conduct plenty of research and analysis prior to taking steps into the world of online CFD trading.

As with any form of trading, there are opportunities for reward but there are also risks involved. For example, because CFD trading is done on margin, professional clients could stand to lose more than the initial capital they put up to take a position. Retail clients benefit from FXOpen’s negative balance protection, which means they can’t lose more than they deposit.

Being aware of other determining market factors such as fluctuations in supply and demand or geopolitical issues will also help you understand the risks of CFD trading. You can put that knowledge to good use by creating robust strategies that will mitigate those risks.