What is a CFD? CFD stands for Contract for Difference. It is a derivative product that lets you trade without owning the underlying asset. There are a lot of mind-blowing benefits of CFD trading that you should know about. But first, take some time to know the basics.
Ask how your account will get classified.
Asking your CFD broker the classification of your account will help you know the type of service that you can expect to receive. If you are a private client then you can expect to have the ‘best execution’ or no increase in spread and no hidden commission. Being a private client also entails a higher level of compensation and arbitration.
However, most CFD traders, are usually classified as ‘intermediate’ or those who have experience and knowledge about trading. They are not entitled to best execution and are usually given a different price depending on the market condition. They may also take in additional costs.
Don’t get fooled by commission-free deals.
With the price of the necessities all rising up, there is no free lunch in the world anymore. Before you open a position, make sure that your broker will tell you the real cost of every deal that they offer you. You must avoid it because it will make you frustrated if you start paying more than the price that was offered to you. Check out the commission that will be charged to you and ensure that you will not end up paying for an increased spread and another for the commission at the end of the day.
Use risk management tools.
Don’t be too hasty about your decisions and make sure that you don’t rely on luck. Knowing what is a CFD and being lucky are also needed in CFD trading but you need a concrete plan on how to mitigate the risks in your account. Using risk management tools will save you from great losses and keep your account active for a long period of time. This won’t eliminate losses because losses will always be there that even highly experienced traders still get it. But with risk management tools like stop loss and trailing stop, you will have the means to protect your account. After all, you joined CFD trading because you want to earn and not lose money.
Take advantage of leverage but be cautious when using it.
Leverage offers really good advantages. For retail traders, it would be very difficult for them to afford the full amount of the underlying asset that they want to trade. But with leverage, you are only required to pay the partial amount and start trading right away. You can even take the full amount once you win the trade. However, being cautious when dealing with leverage is also necessary because it entails risks too. If profits are mirrored, losses are mirrored as well. You can even lose more than the amount you put into your account if the market gets in the opposite direction of your speculation. Avoid margin calls and make sure that you have enough funds in your account to keep your positions open.