In this lesson of the complete CFD tutorial, you’ll find out why and when to trade CFDs. The practice of CFD trading is especially suitable for certain types of users. Understanding why and when to trade CFDs is the first step before embarking on this potentially profitable path.
However, it is not suitable for all types of investors because it has the following characteristics:
- Very short-term transactions, in the order of a few minutes, a few hours or a few days
- The capital is at risk, because if the outcome is negative, the invested amount may be lost
- If you’re looking for high profits, you need to invest an adequate capital
- You should follow finance/economic news with constancy
One of the most fascinating aspects of trading CFDs online is that you can achieve economic results in a short time, depending on price variations that occurred after opening the position. For example, if we open a purchase position on Unicredit shares and they get a percentage change of 1% in a few hours, our capital will increase proportionately. As for Unicredit shares, I can open positions on thousands of securities worldwide, as well as on currency pairs (e.g., the euro/dollar), equity indices (e.g., Dow Jones or FTSE Mib), as well as commodities (e.g., gold, oil, natural gas, etc.)
The possibility to get results in the short term is one of the main attractions of CFD trading.
However, this speed also requires more effort as more attention must be given to open positions and ongoing transactions. If we open a long/short position (i.e., upwards or downwards) on a security that’s particularly volatile, we will have to keep an eye on our investment to be able to close it as soon as there is a predicted inversion.
One very useful function of the trading platforms for this purpose is that of “Stop.” There are two types of Stop Functions:
- Stop Loss: a function that allows you to set an automatic closure once a specific loss has occurred
- Take profit: a function that allows you to set an automatic closure against the achievement of a certain profit
The word “risk” should not scare you, because every financial activity aimed at gains has a certain measure of risk. “Nothing ventured, nothing gained” as the saying goes. When you have the possibility of earning high profits in a short period of time you must also expect an equally high risk.
Therefore, we want to highlight that CFD trading is an activity with associated risks and is therefore only suitable to those who understand they may incur financial losses. Obviously, you can just win (extreme optimism), just as you can just lose (extreme pessimism).
The saying “no risk, no reward” applies here. In fact, although CFD trading allows you to start with a really limited budget, such as €100, it will obviously offer more important results to those starting with €1,000 or €10,000 or more.
If I open a position with €50 and earn €10 net, I could earn €100 net from €500.
Remember that you can close a position anytime you want, or you can keep the position open until you reach your goal. If, on the contrary, a position no longer convinces us, we can close it when we want. You should perform these transactions during open hours, which are the actual trading hours of the underlying markets.
In CFD trading, because of the speed with which you can (and must!) take advantage of the opportunities that happen every single hour, you must follow news from the financial world carefully. We all agree however that following financial news from all over the world is simply not possible and can be counterproductive. For this reason, here is some advice: only take a few sources into consideration at a time, and keep a few of them among your real “favorites”. For example, EUR/USD is a great asset to trade on and offers excellent insights based on the abundant news that comes in every day. Another asset could be gold or even oil. Trading on the European, American, and Asian stock exchange indices is simpler than you think.
Taking advantage of financial news is a practice that can be done daily. To start, only three things are needed:
- A free trading platform provided by an authoritative broker such as 24option
- A portfolio of main sites to get up-do-date economic/financial news
- A trading account
To start, try a demo account.
Go to lesson 2 – The Financial Leverage