5 Tips For CFD Trading

Source: worldfinancialreview.com

When it comes to trading CFDs, high profits and losses are often very close together. Especially beginners in speculating with CFDs are often inspired by high profits, which can be achieved with the help of the leverage effect. However, they also run great risks of loss.

It is therefore advisable to consider some basic tips in CFD trading. What these are, explains the following article.

Speculative trading consider

CFDs are highly speculative financial tools that fall under the category of derivatives. This is accompanied by the fact that their respective value is always dependent on the performance of other values, such as currencies, indices or stocks. These values are also referred to as underlyings.

There are therefore very big differences between direct investment in shares and CFD trading. Investors should be aware of this at all times.

Obtain information

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Unlike certificates and warrants, for example, the design of cfd stocks is shown to be very transparent and simple.

Nevertheless, it is highly important for beginners in CFD trading to obtain comprehensive information and acquire a certain basic knowledge so that they understand in detail how CFDs work. Only then should they start trading.

Choose low leverage

Of course, leverage in the field of CFDs is a great temptation, especially in the beginning. The price changes show the greater effects, the higher the respective leverage is chosen.

Of course, this also increases the chance of higher profits – however, the same also applies to losses, because leverage can always have an effect in both directions. If too much leverage is chosen, this means a total loss in unfortunate cases. Especially for the first investments, you should therefore limit yourself to low levers.

Use known underlyings

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Since CFDs belong to derivatives, they are always dependent on their respective underlying assets. Brokers operating in the field of CFDs assume the function of a market maker. This means that the customer’s order is not passed on to the stock exchange, but the broker itself sets the selling or buying price.

For this reason, it is very important that the chosen broker shows prices that reflect the prices of the underlying assets in the market. If there are major deviations in this respect, this can otherwise have far-reaching effects on the profit or loss due to the leverage effect.

Beginners should therefore also invest at the beginning exclusively in CFDs whose underlyings they know. Above all, the Dax or American and European blue chips are recommended. In the area of commodities, oil and gold are particularly suitable.

Exploit money management

Since CFDs are characterized by the already mentioned leverage effect, it makes sense to prioritize the preservation of capital or the limitation of losses. The respective risk can be influenced in such a way by the investor purposefully.

In principle, the entire investment should never be placed on just one card. In addition, it should be clearly defined in advance how high the losses may be in relation to the total volume of the portfolio. In this way, the risk in CFD trading can already be significantly limited.