Why You Should Consider CFDs As A Forex Trader: Success Tips
There’s been a lot of buzz around contracts for futures (CFDs) and other derivatives in recent years. Some investors love them while others, especially traditional trading purists, give them a wide berth. However, there are many reasons why you should consider adding CFDs to your trading arsenal if you are a forex trader. Here are some of them plus some success tips.
Understanding CFDs (Contracts for Futures)
CFDs are derivatives where a buyer bets on the price movement of an underlying tradable asset like forex currency pairs, stocks, commodities, etc. The CFD buyer does not hold any of the assets they are betting on at any point. At the same time, the seller or CFD provider does not need to hold any of the assets on whose price movements they base their CFD spreads.
CFDs can be complex for most traders especially those that are new to trading or traditional traders and investors. However, a solid understanding of trading in general and how to make price movement predictions is all you need to make profits by buying and selling contracts for futures.
You need to sign up with a broker, investment bank, or CFD provider that sells CFDs or deals with derivatives in general. Spend time studying their CFD terms and account opening conditions before you jump in just to be sure they have what you are looking for. More importantly, make sure you are allowed to trade CFDs in your country.
Why Trade CFDs: Advantages of Buying CFDs
There are many advantages to getting into CFDs if you are fairly experienced in forex trading or day trading in general. Here are some of them:
CFDs Offer Flexibility for Forex Traders
CFDs offer a lot of trading flexibility allowing traders to speculate on any asset they may be interested in at any time. For instance, as a forex trader, you can buy CFDs on a bunch of currencies and then diversify with stock CFDs, commodity CFDs, etc.
You can also trade short or long with the same terms making a profit or loss depending on the direction of the underlying asset’s price. You can choose to sell if you bet that the price of the asset will fall or buy if you anticipate a rise in the price of the asset. Either way, you will make multiplied profits depending on the number of units held per trade.
Lower Capital Outlay
You don’t have to commit a lot of capital when buying CFDs as you only need to bet a small percentage to open a trade and a small amount to close a trade. This leaves you with cash in your account to execute other trades or buy more CFD units and multiply your profits. Your deposit will, however, be deducted if the price moves against you. Make sure you use a trading account that prevents negative deposit balances.
Access to Worldwide Markets
You can speculate or bet on any assets across markets when trading CFDs. You are not bound by geographical location. Most brokers have thousands of assets from all markets across the globe to bet on. This can be a great way to diversify your portfolio and learn about new markets.
CFDs Offer Higher Than Normal Leverage
You will get more leverage with CFDs than you will get with any other financial instrument. Leverage for CFDs is usually at the discretion of the provider and is not subject to regulation. This means you can get higher than normal returns when your trades are successful. Of course, this might also mean bigger losses when you are wrong.
You Can Make Profits in Harsh Market Conditions
Traders who specialize in CFDs usually thrive when there is a lot of turmoil in the markets. You can bet on stocks falling without holding the soon-to-be-worthless stocks in your portfolio and make good money while at it. Imagine making profits by betting on a company’s stocks when it’s about to go bankrupt. That is the beauty of derivatives and specifically CFDs.
There are many other advantages to trading CFDs, especially as an experienced forex day trader. The most important thing is to understand the instruments you are betting on and how to use the leverage you have to multiply your profits. Good luck!