Understanding CFD Trading with an Example

Since traders can speculate on the price movement of underlying assets without owning them, CFD trading has grown in popularity in recent years. Visit MultiBank Group

Trading opportunities are abundant in both bull and bear markets because traders can speculate in both rising and falling markets.

Because they allow traders to trade a variety of different asset classes and to use leverage, CFDs have grown in popularity as trading instruments. They offer traders a high degree of flexibility and are cost-effective.

The Good, the Bad, and CFD Trading

When you trade derivatives, such as CFDs, you can make predictions about the rise and fall of stock prices. A variety of assets are available for trading, including shares of stock, foreign exchange, commodities like gold and silver, and indices. More than 10,000 international markets are accessible through CFD trading, and since every trade you make is leveraged, you do not need a lot of capital to get started.

You don’t invest in the actual asset when you trade CFDs, as opposed to buying or selling a security. For instance, you simply speculate on whether the price of gold will increase or decrease rather than buying or selling actual gold. Know more ¿Qué herramientas de Trading utilizar?

CFD Trading and Gold Prices

Using gold as an example, we can see that prices decreased because demand for the metal started to decline in Q4 2017. In fact, the price of gold fell to less than $1,250 per ounce, and some analysts predict that it will fall even lower by the end of 2018—possibly to under $1,150. Strong U.S. tax reforms planned for 2018 and rising yields from investment bonds in the United States are two factors contributing to the anticipated decline.

It is obvious that gold prices can fluctuate, so it is important to monitor economic data, especially U.S. interest rates, as they have a direct impact on gold spot prices. If you believe that gold prices will increase, you should buy, or “go long.” However, you should “go short,” or sell, if you believe that gold prices will decline more frequently.

Correct market predictions by traders result in profits based on multiples of the traded CFD units. You will suffer a loss, though, if you choose incorrectly and the price movement goes against you.

CFD Trading Risks

Because you only need to put up a small portion of the full value of the asset you trade, CFD trading is appealing. Trading margins can be as low as 1%, so if you take a position worth $20,000, it might only require a $200 deposit. For an armchair investor, this is not a significant sum of money.

If you have a profit margin, the amount of money you make will be determined by the asset’s total value. This means that the small margin deposit needed to hold the CFD can easily be exceeded by your profits. You could, however, lose more than your initial investment if you make a mistake and suffer a loss.

The main risk of CFD trading is found in this. If your positions are still open at the end of trading, i.e., held overnight, you might also be charged holding fees. Depending on the trading platform or broker you choose, there may also be commission charges. Know more Conoce el Horario del Forex

If you want to protect your investments in the underlying shares and assets that CFDs represent, especially in volatile markets, CFD trading can be a very helpful – and profitable – strategy. Naturally, you can also trade CFDs directly, by themselves. It’s not necessary to only use CFDs for hedging purposes and to have other investments. Just make sure you are completely aware of the risks before you start trading CFDs.