Contracts for difference are popular financial instruments. They allow you to speculate on price without ownership of any assets. Here is how to use them.
Can You Make Money With CFDs?
Today, traders in Nigeria may use a wide range of instruments. CFDs are virtual derivatives. Unlike futures, they are not linked to physical delivery. Instead, you capitalize on price trends alone. Here is a close look at the instrument, and the way it generates returns.
Those who trade on Forex have little difficulty switching to CFDs. The instrument is often used for portfolio diversification. Choose an underlying asset you know best, and monetize your knowledge! There are CFDs on stocks, commodities, and more. Whatever you trade, general principles are the same.
Definition of CFDs
The term ‘Contract for Difference’ describes a special agreement between a seller and a buyer (i.e., a broker and their client). As the term suggests, the subject is the difference. This is the gap between the current price of the asset and its price in the future. Under this agreement, the client receives the amount when they decide to sell.
Any market trends may work to your advantage if you anticipate them. In this regard, CFD trading is just like Forex. There, traders buy currencies when they expect a raise, and sell before a downtrend. Both long and short positions are acceptable and potentially lucrative.
Your goal as a trader is to foresee market movements. Study the market for the underlying asset, and make informed decisions. Learn more on CFD trading meaning and best strategies. With ForexTime, you may choose between:
- market indices,
How Does Trading Work?
To trade CFDs successfully, you need to understand how the underlying assets are valued. However, you do not need to own them — it is pure price speculation. This makes CFDs so attractive to many investors.
Another element of this appeal is leverage. Brokers allow their clients to trade CFDs worth more than their deposits. Also known as trading on margin, this arrangement increases potential returns. For example, someone with $1000 in their account may open positions worth $100,000 if the leverage ratio is 1:100. If the trade is successful, they make a hundred times more than would be possible otherwise.
Brokers may have different margin requirements. There’s a reason why leverage conditions are so rigorous. As your buying power grows, so do the risks.
Higher volumes are always accompanied by higher potential losses. A momentary change in the market could impinge on the previous results. Thus, traders need an adequate risk management strategy.
What Makes a Good Trader
These are essential skills and traits that increase your chances of success. Remember that the outcome depends on you. Even the most renowned broker does not influence the markets or the trends you need to follow.
1. Knowledge of the Market
This is a complex environment. The trader needs to explore it well. Learning never ends. As the CFD marketplace is vibrant, you need to keep track of the changes and adapt your strategies accordingly. Generally, traders need to accept wider spreads than for other instruments. Margin calls may be frequent, and overnight changes are not uncommon.
While knowledge is vital, it does not always guarantee success. Rookies must be aware of all risks associated with CFDs. This market may get volatile at times, which puts your funds at risk. Learn about the most efficient risk management techniques, and apply them in practice.
2. Training and Education
Every trader must devote time to training. Apply theory to practice, but do it safely. Reliable brokers offer demo accounts, so you may practise in a risk-free mode. Months of preparation may sound boring. Still, delving into live trades from the start is an expensive mistake. Make sure you know how to identify entry and exit points.
The experience you gain during the demo period is vital. It helps you develop your own system for CFD trades. You can test different strategies without risk, and create your roadmap.
You cannot trade on a hunch. To make steady profits from CFDs, develop a disciplined approach. Review your performance and update the plan regularly. It must be suitable for your goals and trading style. There is no place for gambling here.
The Bottom Line
It is possible to make money trading CFDs. They allow you to profit from upward and downward trends, and trade more than you deposit. However, there are a few important caveats.
Gain sufficient practice before trading in live mode. CFDs are generally seen as risky due to their leverage nature. However, leverage also explains their appeal. Until you know how to manage risks in this market, it is best to delay entry.