Contract for difference (CFD) trading is a financial tool that has already revolutionized access to the markets. One of the biggest attractions lies in the way it differs from older forms of trading by offering a huge amount of choice in several important areas. Investors of all kinds, both those with experience and complete novices, have discovered that the advantages are immediately apparent.
Although CFDs may share some similarities with so-called ‘mature’ products such as options and futures, trading on this basis brings with it many unique advantages which can be used to great success by employing a well planned and executed approach.
Choice of markets
One of the first and most obvious advantages of trading with CFDs is that the range of assets and markets available is huge. Underlying assets on which positions can be taken range from stock exchanges, commodities, forex markets and other variables such as market indices and even central bank interest rates.
Not only are the basic assets themselves numerous, the fact that CFDs operate on a global basis means that trading isn’t limited to the opening hours of a particular geo-location, essentially opening up opportunities 24/7.
Choice of strategies
Because CFDs are so versatile, they can be used in conjunction with a wide range of strategies and methodologies. For those who like to base their trading decisions on tried and tested systems such as technical and fundamental analysis, there are many sources of robust and accurate data that can be easily accessed and processed. For others who might prefer a more informal approach, the so-called ‘news strategy’ is an accepted way of doing things within CFD circles.
By making use of 24-hour rolling news channels, real-time RSS feeds and more specialized financial data streams, even a novice DIY investor can access up to the minute developments that would have been unthinkable only a few years ago. Basing a whole trading approach on this may seem unusual to traditional investors, but in truth, many mavericks have made fortunes on the stock exchanges of the world for years using a similar approach based on far less available information.
Although the modernity of CFDs may allow taking advantage of superfast broadband, 24-hour global trading and a wealth of wildly different markets and assets, there is still a basic need for planning and preparation. A trading plan is essential for long-term success even though the day to day trading realities might be based on short-term positions.
The ‘trade by trade’ approach taken by many successful CFD proponents may be the opposite of what business schools have been teaching budding investors for decades, but this is often due to the mistake of mixing up strategy and tactics. Essentially, each individual trade can be seen to be taken on a tactical basis, whereas the overall aim for each trader must be seen as a far more strategic long-term target.
Again, the flexibility and choice offered by CFDs means this distinction can really be played to the full. Each trade may be made over a different time scale, using totally different assets from markets that have nothing in common with each other.
CFD trading does not sit well with following hunches, gut feelings or guesses. The ’emotionless trading’ approach that relies on placing data at the heart of decision making is key to success with CFDs, and by the same token, the instrument itself is perfectly suited to such an approach.
Knowing how to analyze different markets is something that can be taught and learned, and the unique mix of experience and skill that can be built up is what goes to make a successful CFD trader. Every individual will have criteria that suits their own needs, and this can encompass everything from deciding on a risk/reward ratio that is acceptable right through to having a time scale to reach specific financial targets.
However, what CFDs can help with is taking personal involvement out of trading decisions. For instance, someone who is particularly interested in ecological issues may wish to invest in stock for a company that has a high profile ‘green’ agenda. When it comes to CFD investments, this is totally the wrong approach to take, as the focus must always simply be on whether the value of a chosen asset or market will rise or fall. Having an emotional connection of any kind to a trade could lead to holding a position longer than it should be and incurring damaging losses.
Leverage is an essential element in the way that CFD trading can offer choice. Being a leveraged product means that CFD trading only requires a margin deposit to be put down in order to open a position. In traditional forms of trading where assets are bought and sold, the full contract value is usually needed as seed capital, but as the underlying asset in a CFD trade is never actually owned, this doesn’t apply.
This means an investor can achieve a return on capital far beyond that which can be achieved otherwise. However, it also increases the risk of larger losses too. Fortunately, there are many risk management methods which can be used to limit exposure, and so leveraging is ultimately yet another example of how CFDs offer more choice than other forms of trading.