How to Trade CFD’s: Making your Mark on the Financial Market

As the financial markets have evolved, investors have constantly strived to find ways of maximising their returns. As a result, a number of new derivatives and financial instruments have emerged onto the market, each of which increase the leverage for investors and their potential returns. While some of these fiscal products have created significant instability of the market, however, the majority have been embraced with open arms.

CFD’s (contracts for difference) now have their own unique place in the financial markets, and are a way of trading individual price movements without purchasing an underlying instrument. Relieved from the burden of ownerships and its associated risks, investors can speculate on both upward and downward shifts and profit accordingly.

How to Trade CFD’s: 3 Tips for Success

With this in mind, what practical steps can you take to trade CFD’s in an efficient and profitable manner? Consider the following: -

Understand the Risks Involved: As with most derivatives, the greatest strength of CFD’s can also prove to be a considerable weakness. While the lack of tangible ownership minimises the risk of diminishing market value, it can also create dangerously high levels of leverage and trigger significant financial losses. As proved by the disruption caused by CDO’s and the way in which their losses far superseded the value of their underlying instruments, flexible leverage can cost more money than investors have originally laid out. You must therefore understand this and strive to manage your own leverage, while being careful to invest a responsible amount of capital.

Learn to Pre-empt Market Trends: While trading CFD’s allows you to profit from both long and short positions, it is possible to lose considerable sums of money. If you are unable to pre-empt market trends and assume an unfavourable market position, then it will ultimately move against you and place your hard earned capital at risk. It is therefore crucial that you are able to display intuition as a trader, and forecast market price movements before they unfold. A broad base of knowledge and understanding is key to achieving this, especially if you invest within a volatile and unstable market environment.

Establish Viable Risk Management Techniques: When you commit to margin based investments, it is crucial that you establish viable risk management techniques. You cannot avoid risk in markets with high leverage and liquidity, so the next best thing is to embrace them and learn how to manage them effectively. Placing stop losses on your account is especially suitable when trading CFD’s, especially as you may assume both long and short positions within your chosen market. Stop losses automatically trigger the execution of trades once the price meets a pre-determined value, and this allows you to retain at least some of your money in a depreciating market.

In Summary

While trading CFD’s offers the opportunity for great financial returns, it is a delicate art that demands knowledge, skill and market intuition from investors. Without the ability to understand risk and learn how to forecast market trends, the quest for substantial financial returns could lead to considerable losses of both time and capital.