If you’re a forex trader, who have access to a lucrative and liquid market that’s becoming increasingly diverse with every passing day.
An example of this can be found in the form of contract-for-difference (CFD) trading, which enables individuals to buy and sell currency and a host of additional assets without requiring them to take ownership of the underlying assets. This makes CFDs derivative products, which can be traded on margin and for significant profits.
But what are the fundamental elements that forex traders need to understand about CFDs? Let’s find out!
1. How Exactly Does CFD Trading Work?
When you trade a CFD, you essentially agree to exchange the difference in the price of an asset from the point at which a contract is opened to when it’s closed.
The flexible form of trading enables you to speculate on currency price movements in both directions, with profit and loss figures dictated by the extent to which your forecast is accurate.
With this in mind, knowledge and insight are crucial to your success as a forex CFD trader, so you’ll need to leverage online brokerage platforms like ATFX to access real-time and historical analytical tools.
You should also note that CFDs deliver margin-based returns, and whilst this can translate into big wins it can also trigger disproportionate losses.
2. The Importance of Determinism
When trading derivative products such as CFDs, there are a wealth of data sets and analytical tools that can inform your investment decisions.
The forex market is also incredibly volatile, and this creates frequent price shifts that can be hard to pre-empt within a given period of time.
These data sets and price movements can be contrasting at times, whilst they’re also capable of triggering emotive reactions from traders.
This is why determinism is one of the most important CFD trading fundamentals, as it helps you to understand the underlying laws that govern change in the forex market and avoid knee-jerk reactions to real-time events.
3. CFDs Provide Higher Leverage than Traditional Trading Vehicles
CFDs also offer higher levels of leverage that traditional trading vehicles, enabling investors to maximise the value of their forex trades and benefit from more flexible margins.
Nowadays, CFD leverage is limited within a range of 3% and 50%, and this creates diverse appeal for both risk-averse investors and those with a desire to pursue larger returns.
Lower margin requirements can reduce the capital outlay required from investors and boost their potential returns, however, making them ideal for newbies and investors who want to manage their risk effectively.