Contracts For Differences
When it comes to trading, Contracts For Differences or CFDs have become quite a well-known trading instrument.
Why is this so, and what are the pitfalls of trading Contracts For Difference? There are CFDs available on shares, indices, commodities and other instruments.
This trading instrument includes costs of brokerage, interest on long positions held overnight, and variations in spread widening unless Direct Market Access CFDs are used.
Let's have a look at the 3 advantages of CFDs: 1.
Leverage Leverage means that your gains and losses are multiplied.
It is a double-edged sword, so if your trading system is robust and works, then results will be magnified and gains larger.
But if there are losses, these will be larger.
Leverage, though available, does not have to be used to the maximum.
2.
Going short and long Going short means increasing your ability to profit from the market, as you can do so with stocks which are going down in value.
Many systems do this such as trend following, and mean reversion, systems.
This means that you are not relying on a bull market to profit from the market.
3.
Lower commissions On general, commissions or brokerage is lower on CFDs than shares, depending on the provider.
If this is the case, then this may be advantageous.
Take also into account the spread, whether it is Market Maker or Direct Market Access, as well as slippage, if you are trading illiquid stocks or shares.
The pitfalls of Contract For Difference trading include: 1.
Using too much leverage.
As a mirror to point one in the advantages of trading CFDs.
When misused, a trader can have large losses if the trade goes against them.
Inexperienced traders or traders who take too much risk, have increased risk of large draw downs and margin calls.
2.
Not using a solid trading system.
There is never a trading system that is guaranteed to perform in the future, but trading with no system or with a system that is not working will be unlikely to lead to profits.
Some systems are mechanical, while others are based on fundamental analysis.
Yet others rely on technical analysis, but not purely mechanical such as those involving chart patterns.
Whichever system you use, ensure to the best of your ability that there has been some forward, real time testing done on them, not just back testing.
3.
Not having enough education.
Many traders have little understand of how to position size or to limit risk per trade by calculating the actual risk per trade.
When this occurs, the amount of risk per trade is often too large and during losing trades can result in large losses.
The risk has to be not too small to be eaten away by brokerage but not too large either.
There is also the general knowledge about all the details of trading including stops.
So as you can see, there are advantages and pitfalls to trading Contract For Difference.
Good trading is a mixture of enough knowledge and skill by knowing what you're doing and knowing your trading platform well to place trades correctly.
Why is this so, and what are the pitfalls of trading Contracts For Difference? There are CFDs available on shares, indices, commodities and other instruments.
This trading instrument includes costs of brokerage, interest on long positions held overnight, and variations in spread widening unless Direct Market Access CFDs are used.
Let's have a look at the 3 advantages of CFDs: 1.
Leverage Leverage means that your gains and losses are multiplied.
It is a double-edged sword, so if your trading system is robust and works, then results will be magnified and gains larger.
But if there are losses, these will be larger.
Leverage, though available, does not have to be used to the maximum.
2.
Going short and long Going short means increasing your ability to profit from the market, as you can do so with stocks which are going down in value.
Many systems do this such as trend following, and mean reversion, systems.
This means that you are not relying on a bull market to profit from the market.
3.
Lower commissions On general, commissions or brokerage is lower on CFDs than shares, depending on the provider.
If this is the case, then this may be advantageous.
Take also into account the spread, whether it is Market Maker or Direct Market Access, as well as slippage, if you are trading illiquid stocks or shares.
The pitfalls of Contract For Difference trading include: 1.
Using too much leverage.
As a mirror to point one in the advantages of trading CFDs.
When misused, a trader can have large losses if the trade goes against them.
Inexperienced traders or traders who take too much risk, have increased risk of large draw downs and margin calls.
2.
Not using a solid trading system.
There is never a trading system that is guaranteed to perform in the future, but trading with no system or with a system that is not working will be unlikely to lead to profits.
Some systems are mechanical, while others are based on fundamental analysis.
Yet others rely on technical analysis, but not purely mechanical such as those involving chart patterns.
Whichever system you use, ensure to the best of your ability that there has been some forward, real time testing done on them, not just back testing.
3.
Not having enough education.
Many traders have little understand of how to position size or to limit risk per trade by calculating the actual risk per trade.
When this occurs, the amount of risk per trade is often too large and during losing trades can result in large losses.
The risk has to be not too small to be eaten away by brokerage but not too large either.
There is also the general knowledge about all the details of trading including stops.
So as you can see, there are advantages and pitfalls to trading Contract For Difference.
Good trading is a mixture of enough knowledge and skill by knowing what you're doing and knowing your trading platform well to place trades correctly.
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