Top Advice On CFD Contracts Trading For Beginner Traders

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CFD Trading for beginners

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CFD Trading for beginners

WHAT IS CFD TRADING?

The acronym “CFD” stands for contract for difference. Contract for Difference is the name given to an agreement between a trader and a broker in relation to the change in the value of an asset over time.

Of course, there’s plenty to consider before you dive in and start CFD trading This is why we’ve created this beginner’s guide: to provide a simple, jargon-free solution to help you get to grips with everything you need to know.

Once you’ve read this guide, we expect you’ll be itching to give it a go. Even if you don’t think you’re quite ready to join the thousands of other traders here at Spread Co, you can set up a risk-free demo account, just until you’re confident enough to trade for real!

HOW DOES CFD TRADING WORK?

Just like spread betting, CFD traders never own a given share, index or commodity. Instead, a CFD trader backs their judgement on whether the value of an asset will go up (going long) or down (going short).

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Traders only need to put down a small deposit on a given CFD and this is what is meant by trading on margin. . For example, if a trader trades the Germany30 with an asking price of 100 pence, typically, only 0.50% would be required as an initial deposit.

If the trader correctly predicts the outcome of a trade, the seller pays the difference between the initial buy price and the new value of the asset. On the other hand, if the trader gets his/her prediction wrong and the asset moves in the opposite direction, they are expected to pay the difference. An example of a successful trade can be seen below.

WHAT IS THE SPREAD?

The spread is the name given to the difference between the selling price (or bid) and the buying price (also known as the offer, or ask, price). The bid price is the lower of the two prices and this is what a trader can sell at. .The higher price is the offer, or ask, and this is what the trader can buy at.
To find out more about the different types of spread, click here.

WHAT CAN I TRADE ON?

Here at Spread Co, you can place CFD trades on individual equities, stock indices, currencies and commodities. In some cases it’s possible to trade 24 hours a day, five days a week.

INDIVIDUAL EQUITIES(SHARES):

Limited companies such as Tesco, Apple and Facebook are floated on the stock market meaning anyone can invest in them. The shares in these companies rise or fall depending on the overall economic environment or due to factors specific to the company itself – for instance, quarterly earnings, management changes or the appearance of competition in a particular sector.

STOCK INDICES:

Examples of stock indices include the UK100, US30 and Japan225. Each index is made up a selection of the top companies, usually in a particular geographical area. For example, the UK100 includes the top 100 UK companies by market capitalisation.

COMMODITIES:

Commodities include things such as crude oil, gold, silver and copper. The price of these can fluctuate due to a number of factors, including global supply and demand, currency fluctuations and geopolitical considerations.

CURRENCIES:

Just like commodities and share prices, currency pairs also rise and fall in value. Go long if you think the first-named currency in a pair will rise, and go short if you think it’ll fall.

HOW DO YOU PLACE A CFD TRADE?

Placing a CFD trade here at Spread Co couldn’t be easier. Once you’ve decided what you’d like to trade on, simply click on the higher “offer” price if you think the price will go up, or the lower ‘bid’ price if you think it will fall.As you’re trading on margin, you’ll need to hold on your account the appropriate minimum deposit required to place your trade. This will be much smaller than the amount required to buy an asset outright.

However, bear in mind that it’s important to hold additional funds (over and above initial margin requirements) on your trading account. Prices are always moving. If they move in your favour then this shows up as a running profit. But if they move against you it’s important to hold variation margin to cover any unrealised loss.

You may want to set a stop limit too , as this will help to limit your losses should you get your prediction wrong.

A limit can also be added – this means your trade will be closed automatically once it reaches a specific level set by you. For example, if you buy (go long) a CFD at a price of 100p, you can set a limit to automatically close this trade if it hits a sell price of 110p. This gives you peace of mind as you won’t have to keep checking your account every five minutes. Alternatively, you can manually close a trade anytime that the underlying market is open. For currencies this is 24 hours a day.

SHOULD I GO LONG OR SHORT?

Unfortunately, there is no magic formula when it comes to placing a successful trade , and even the best traders lose occasionally. However, if you’re willing to do a bit of research and keep one eye on current affairs, you’ll be in a much stronger position to make a profit.

Obviously, there’s a lot to look out for, including corporate earnings reports, geopolitical events and economic data releases. But the main trick is to keep your losses small and to run your profits. In this way you can have more losing trades than winners and still make profits. This is why money and risk management is so vitally important.

NOW IT’S YOUR TURN

If you’re not 100% confident but still wish to dip your toes in the world of CFD trading, why not set up a risk-free demo account here at Spread Co? Profits might not be real, but neither will losses. And they’ll still mirror actual market changes so you can see how much you could’ve won (or lost) if you’d traded with real money!

Disclaimer: Spread Co is an execution only service provider. The material on this page is for general information purposes only and nothing contained herein constitutes (or should be taken to constitute) financial or other advice which should be relied upon. It has not been prepared with your personal circumstances, financial situation, needs or objectives in mind, therefore any actions taken or not taken by any person on the basis of this material is done entirely at their own risk. Spread Co accepts no responsibility whatsoever for any such actions, inactions or resulting consequences. No opinion expressed in the material shall amount to (or be taken to amount to) an endorsement, recommendation or other such affirmation of the suitability or unsuitability of any particular investment, transaction, strategy or approach for any specific person. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As such, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.

Beginners Guide to CFD Trading

Beginners Guide to CFDs Trading

If you are a forex trader who is searching for information on how to broaden your trading skills to include other financial instruments. We have compiled an all-inclusive CFDs guide that will educate anyone who is new to the market. Every currency quote commonly comes with a selling price on the left and a buy price on the right. The profit you make as a trader is the difference between the price you enter the market and the time which you exit the market.

What is a CFD?

A CFD, or contract-for-difference, is a financial instrument or asset that lets traders make gain from price fluctuations rather than from actually acquiring an asset. It’s basically an agreement between two people to pay the difference between the current price of the underlying asset and the price it will be at the time the trade is closed. The underlying asset could be stock, index, FX pair or commodity.

CFD is a derivative product which gets its pricing from the underlying asset it is tracking.

Let’s assume that you want to trade the National Australia Bank (ASX: NAB) and the present ASX stock price was 50 dollars; then the CFD would as well be quoted as 50 dollars.

The contract of difference on NAB will try to always replicate the price performance of the underlying stock.

Standard stock trading and CFD trading are related apart from the fact that you are required to deposit only a small amount of money before the trade. Other minor differences between the two include CFD finance and CFD leverage. If you are looking to trade CFD, it is essential that you properly weigh your risks before you dive into the market.

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Can traders who are starting out trade CFDs?

If you are just starting out as a trader, you may be wondering if CFD trading is suitable for you. The first thing you need to do before trading any financial product is to have a thorough knowledge of that product and how it works.

Therefore, to trade a CFD, you must know the associated risk and what your benefits are likely to be if you start to trade the asset.

Who owns the CFD or stock?

When you trade Contracts for Difference, you aren’t really the owner of the physical stock. Also, you won’t be given a contract letter the way it works when doing a standard trading of shares.

All you are doing is merely trading the price difference between the entry price and the exit price.

Key reasons people trade contracts for difference (CFDs)

There are a few reasons people go for CFDs instead of the normal share trading. These reasons have been presented below:

  1. To gain from short-term price fluctuations in the stock, index or commodity markets.
  2. To trade with the leverage offered by the CFDs. Sometimes traders have a leverage of 100 to 1 or even higher leverage when the trade involves Forex, Index and Commodity products.
  3. To serve as a hedge for your real share trading portfolio. A number of people make use of the CFDs for managing their risk instead of serving as a speculative trading opportunity.
  4. CFDs let you have access to the international stock markets from a single trading account.
  5. CFDs frequently come with a lower cost of trade commissions or cost of trade with a broker. For instance, brokers in Australia charge as small as 5 dollars to let traders access an Aussie Share CFD trade.
  6. CFDs allow you to take advantage of short selling. This implies the trader can gain from short trade opening if the position value falls. Alternatively, if your short trade price increases, it would put you in a losing situation.

7. A contract for Difference trading also gives traders access to dividends and come with no expiration time as in options trading.

Comparing CFDs with other financial instruments

Trading CFDs comes with a broad list of assets to choose from the same way it is in options and futures trading. Popular assets traded as CFDs include stocks, commodities, and indices. Because they depend on the prices of an underlying asset, trading CFDs also exposes the trader to the market risks. Trading CFDs comes with leverage advantage. However, you also need to know that at the same time it exposes you to liquidity risk and may lead to margin calls.

Trading CFD is not the same as spot trading because CFDs let you trade other financial assets in addition to currency pairs while in spot trading the trader only deals with currency pairs. The implication of this is that the factors that influence the market situation in forex trading like economic events, technical breaks and so on may have less influence when you trade CFDs.

Options trading are more closely related to CFD trading. However, one of the main differences between trading Contract for difference and option is that options trading come with expiry dates while CFDs don’t. The amount a trader loses in options trading like CFDs is merely the amount of money paid in option premium.

Who can trade Contract for Difference?

You can commonly trade CFDs as long as you are more than 18 years old, also other countries may have different age restrictions. However, you need to bear in mind that trading a leveraged product like CFDs are very risky as it can leave you with a loss that is much higher than the amount you began with. Thus, CFDs may not be a suitable instrument for everybody.

For, this reason, it is very important that you fully understand the risks involved before you start to trade this financial instrument. Also, endeavor to read the pertinent PDS and the disclaimer of the company you want to trade under their platform. With this important note out of the way, yes, there are many categories of people that can trade CFDs and these include:

  • Investors who want to hedge their existing share portfolio
  • Traders of all types both short-term traders, medium-term traders or long-term traders
  • Those who engage in intraday trading
  • Traders who use swing trading strategies

• Practically anyone who wants to take advantage of price fluctuations in the financial market whether long or short.

How to trade CFDs

In this part of the guide, we have provided a brief overview of steps involves in CFD trading:

  1. Select a financial instrument

Your first step to CFDs trading is to decide on the financial asset you want to trade like the XAU/USD or UK 100 etc. Some brokers offer traders with CFDs across a broad range of global financial markets which includes forex, indices, commodities, shares, and treasuries.

  1. Decide whether you want to go long or go short

Going long simply means buying. You buy when you feel that the price of the CFD will rise. Alternatively, you can go short or sell if you think the asset price will fall.

This step requires you to decide on the number of units you plan to trade. The value of a single CFD differs considerably. The price depends on the CFD instrument.

  1. Develop risk management plan and implement it

Choose from a collection of stop-loss orders, which needs to include guaranteed stop-loss orders (GSLOs). GSLOs functions in a similar way to the standards stop loss orders apart from the higher premium. Using the guarantee stop-loss order ensures that the broker closes you out of trades at the exact time you set irrespective of the volatility of the market or gapping. The trader would be refunded the premium if the GSLO is not implemented. But this guarantee is not with every broker, it is best to find out if your broker offers Guaranteed-stop-loss orders.

After placing your trade order, the next thing you need to do is to monitor how it is doing. Keep an eye on your open positions and remember to watch your stop orders or take-profit orders. This enables you to track your real-time profit or loss. Bear in mind that your losses in CFDs can be more than your deposit because of the high leverage. Some brokers offer Negative balance protection for these rare and unforeseen situations.

This is the last step of your CFD trading. If you don’t automatically close your trade with either stop loss or take profit or if for any reason, it is not initiated by the system, manually close your trade and exit the market when you deem necessary.

Compare Day Trading Accounts and Brokers

Learn what day trading is and where you can sign up for the best broker accounts. Compare all the top brokers that cater to day traders and learn which financial products are most profitable.

Day Trading Brokers List

Chart

Charts and patterns are important tools for day traders. This chart is set to show the Bitcoin / USD exchange rate, which is a great day trading market as there is a lot of volatility and action driven by news releases.

What is Day Trading?

Day trading is the potentially lucrative trading method of buying and selling a security within the same trading day. It is based on the speculation of a financial instrument going up or down in price. Day trading can be achieved in any marketplace, but in the UK is most commonly practiced with the trading of Foreign Exchange (Forex), Stocks, Options and Futures Contracts.

Generally speaking, day traders are well educated and highly invested in the investment practice of day trading. They watch and analyze the markets, keep up with the latest market moving news, and utilize high amounts of leverage (gearing) along with their carefully chosen strategies to benefit from small price movements in equities and the financial marketplace.

Now that we know what day trading is, who are the day traders? Well, day trading was once an exclusive practice, reserved for people working in financial firms while considering themselves “professional speculators”, or even classing it a lucrative hobby.

However, nowadays just about anyone can become a day trader.

The rise of electronic trading and margin trading software has become available to individuals from around the world. So, if this trading method is available for everyone, how does a beginner get involved?

How to Start Day Trading

Pick a Market

First step for a day trader is to decide which markets you will be trading in, with the most popular being Stocks / Shares (Apple, Facebook, Google etc), Indices (FTSE, DAX, S&P), Forex, and Futures. Commodities such as gold, oil or things like grain prices can also be traded.

Forex markets are quite popular among beginners due to the low initial minimum deposit accounts of around £250. Binary options deposits can be even lower (from just £10), but are traded without margin.

Futures require more and stocks require the most money to be invested in for day trading. The best advice we can give is to choose just one asset class to begin with. All of them can be highly profitable, but it is best to focus on just one when starting out.

Equipment & Software

Once you know your market, as an individual day trader, you need the proper equipment and software to commence day trading. As a novice day trader, you will need a fast and reliable computer, it doesn’t have to be top of the line, but not the cheapest one either. In addition, day traders require a fast internet connection. You want to be sure your tables and charts are updating as quickly as possible.

Along with all this, you need a trading platform and a broker to commence trading. As a trader starting out, you will want something easy to use and not too complicated. We recommend traders try out the demo accounts associated with most day trading platforms to get a feel of which software platform performs best. As for brokers to go with, make sure they are reputable and regulated, along with low fees, tight spreads and maybe even bonuses.

Learning via virtual accounts is superior to books or courses. Hands on experience introduces trading psychology (though this is increased hugely with a real money account). The same learning curve is difficult to achieve just by flicking through “Day Trading For Dummies” or hastily written pdf.

Market Hours

Another important aspect to consider before you actually start trading is the time of day and how many hours a day you will be trading. As a day trader it’s important to trade the same hours each day to successfully implement and manage your strategy. The best trading hours are usually around the market opening and closing times.

Forex in particular presents interesting opportunities in terms of trading hours. Currencies are traded around the clock with no central market. This means multiple volume peaks and troughs as new regions wake up or shut down. London markets could be closed – but the GBP/USD pair might still be driven by traders in Indonesia, New Zealand or Hong Kong.

These time zones cycles apply equally to cryptocurrencies. Day trading on Bitcoin or Bitcoin cash will continue around the globe. Lesser known digital currency like Ethereum, Ripple or DASH are also traded 24/7. Cryptocurrency has added a whole new dimension for day traders.

Risk Management

Risk for this type of trading needs to be managed in two ways, trade risk and daily risk. Trade risk is how much you are willing to lose on each trade. An ideal standard is to risk 1% or less of your tradeable capital on each trade.

A trader will manage this by choosing an entry point and setting a stop loss. The stop loss will remove you from the trade if you reach a certain level of loss for that trade. Daily risk is like trade risk in the simple fact that they both limit the total loss amount; only daily risk limits the total losses for a single day. In doing this, bad days are restrained from being too bad and can be recovered by a typical winning day.

Taxes

There is no clear tax applicable for day trading. It will depend on the trading vehicle used, and also how you class the income. For example, if you trade forex at home, for a living, then the tax rules in the Uk suggest you should pay income tax. If however, you trade binary options from home – but class it as a hobby – then no tax will be applicable.

So day traders need to decide how they class any profits. For example, whether they earn a salary and do it “full time”, or not. Rules for forex, cfds and binaries will also differ. If in any doubt, professional guidance should be sought.

Day Trading Strategy

Day trading can be very complicated and it’s easy to get wrapped up with all the trending strategies and complicated chart analysis. One thing to remember is that you don’t need to know it all. All you need is one strategy to focus on, and implement it over and over again. Try out a strategy on a demo account first to see how it pans out.

Top 3 Day Trading Tips

  • Stay Informed, Always look for Opportunity!
    Keep track of the latest stock market news and trends in the economy. Do your due diligence and research companies and the markets they serve. If supply is low and there are still enthusiastic buyers, the price may soar. If there is too much supply and dwindling buyers, the price is about to drop. When staying informed and knowledgeable about certain companies and their performance, massive opportunities will arise, resulting in profitable day trading.
  • Be a Disciplined and Consistent Day Trader.
    Set reasonable take profit and stop loss limits to minimize your losses and maximize realistic wins. Most successful day traders risk 1-2% of their trading capital per trade. Follow this rule consistently, as if there were no other way. As well, trading at consistent times of the day will maximize your understanding of the markets and provide a routine and calculated trading method which can be determinantal to success.
  • Be Realistic and Stay Patient
    When you find a proven trading strategy stick with it. It doesn’t have to win all the time, in fact, most strategies only win 50-60% of the time, so the key is to stick with it and stay informed with market news and the companies you’re betting on. As well, sticking with a strategy requires patience. There will be times when the markets take you for an emotional rollercoaster. It’s important to make your decisions based on logic and not emotions, as well as sticking with your plan.

A Winning Strategy

One of the most used and well-known day trading strategies is the “Momentum Trading Strategy”. This strategy relies on market volatility. It can be used alongside other technical indicators and tools that you find on our trading platform as it relies on spotting trends.

In short it’s where a trader analyzes the markets and looks for the best performing assets over a certain period of time. It involves buying these and conversely selling the worse performing assets. Being well informed and knowledgeable of current market moving news is instrumental to the success of this strategy.

News such as a company’s earnings, a new deal or product launch, or some other kind of breaking news relating to the company can force the price to surge. There are many aspects involved with this strategy, and before implementing it in to your routine, learn all about it to become fully aware of its intricacies. Even practice on a demo account first to acquaint yourself without risking your capital.

Conclusion

So, there you have it, all you really need in day trading is consistency with trading hours and times, a set risk level that you unswervingly follow, and a strategy that works most of the time. It’s important to not over complicate these things and stick to a consistent plan with all aspects of day trading, which rules out the emotional factors that can inhibit your trading.

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