An insight into CFD trading for beginners | Skilling
How do you like the sound of being able to trade the stock markets, without having to physically own the underlying assets you buy and sell? If that sounds like an appealing way to invest in the financial markets, you may wish to consider contracts for difference (CFD) trading.
A CFD is essentially a binding contract or agreement between a broker and a trader, allowing investors to speculate on the rise and fall of financial instruments like forex pairs, indices and individual stocks and shares. Profits (and losses) are made based on the difference between the buy and sell price of each contract.
Of course, it’s not quite as easy as diving in and opening your first CFD trade. There are several steps to getting familiar with the markets, including:
- Choosing a CFD broker
- Opening a free demo account to learn the ropes
- Understanding the real-time graphs and tools to find trading angles
- Considering the fundamental factors which also influence the financial markets
- Learning about leverage and margins before placing real-money trades
Within this CFD trading for beginners guide, we’ll provide jargon-free insight into trading shares, commodities and indices using CFDs.
The top terms for CFD trading beginners to understand
Before you dive in head-first into the CFD markets, it’s important to familiarise yourself with the basic terminology used by CFD traders and brokers alike. The following terms will help you to make better sense of trading CFDs:
Margin – the figure required to pay your CFD broker to maintain any existing open positions in the markets.
Leverage – this relates to the ratio of leverage offered by brokers to enable investors to trade leveraged CFDs. For example, a leverage ratio of 10:1 means that for every £1 you commit, it’s possible to make ten times that amount in profits. Be mindful this also means you can make ten times the size in losses too.
Commodities – CFD commodities allow you to trade the underlying value of assets such as gold, wheat or oil.
Indices – CFD indices allow you to trade the leading indices across the world’s leading stock exchanges, including the FTSE 250 and FTSE 100 and the Dow Jones and NASDAQ.
Long –‘going long’ with a trade requires you to take a buy position on a contract, with a view to selling it at a higher figure for a profit.
Short –‘shorting’ a CFD trade requires you to take a sell position on a contract, with a view to buying it at a lower figure for a profit.
Balance – the total available cash in your trading account, taking into consideration closed and liquidated contracts.
Equity – the overall value of your trading account i.e. the funds available to invest today.
Overnight charges – charges applied by your CFD broker for maintaining open positions overnight.
Stop loss – a conditional order that closes your open position in the market if the value of your asset falls below a predetermined loss level.
Take profit – another conditional order that closes open positions in the market if the value of your asset meets a predetermined profit level.
Slippage – the difference between the price you try to buy or sell an asset and the actual price you take.
Trailing stop – a dynamic form of stop-loss, designed to move your stop loss if the price moves in your favour.
Top tips and CFD trading strategies for beginners
Use Stop-loss orders Stop-loss orders are the ideal way to limit your losses. First and foremost, this is a good way of preserving your trading bank when making your first trades. Secondly, it means you don’t have to micro-manage your holdings hour-by-hour.
Practice with demo accounts Familiarise yourself with the trading software and tools available to you from your chosen CFD broker and trade using ‘play money’. This risk-free environment allows you to get a sense of how the markets work before opening a real money account.
Limit your leverage The greater the leverage you take from your CFD broker, the less breathing space you are giving yourself. If the market starts to move against you, you’ll have precious little opportunity to close your position without incurring a big loss.
Always have a trading strategy Without a clearly defined trading plan, it’s all too easy for CFD trading beginners to veer from the script. This can lead to overtrading i.e. getting involved in markets you wouldn’t ordinarily trade based on your original trading strategy.
What are the main factors determining a successful CFD trader
There are three ways you can improve your trading skills and prepare There are three ways you can improve your trading skills and prepare yourself for potential long-term profits in the CFD markets:
- Embrace trading psychology and risk management It’s important to accept that trading the stock markets is an emotive business. Accepting risk and losses is not something the human brain is trained to do. The most successful CFD traders remain level-headed in the markets. They do so by utilising risk management tools and techniques to limit the effect of emotions and biases when active in the markets.
- Acknowledge the most common CFD trading flaws and learn how to avoid them The most successful CFD traders dedicate time and energy to learn from the mistakes of others. They evaluate their winning trades just as much as their losing trades. Trading diaries can help to review past trades and tweak future trading strategies.
- Use CFD trading strategies that minimise your risk and maximise potential gains The most successful CFD traders acknowledge the importance of the risk-reward ratio in their trading strategies. They embrace this metric as a means of improving their chances of achieving long-term profitability in the markets.
Georges Soros – “It’s not about whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
Discover more about the basics of CFD trading at the Skilling Academy
Knowledge is power when it comes to making financial investments, including CFD trades. Understanding CFD trading strategies for beginners can be a daunting prospect without sufficient education on the tools, market dynamics, psychology and strategies that can be deployed to help you become a profitable trader in the stock markets.
At the Skilling Academy, we’ve put together dozens of educational trading guide pages, covering the basics of CFD trading. Although these articles shouldn’t be treated as direct investment advice for the markets, it gives you a clear insight into the traits of successful traders.
Not investment advice. Past performance does not guarantee or predict future performance.
Do not stop learning about the financial markets
We’ve got a whole host of resources that are ready and waiting to educate newcomers to trading CFDs online, including:
- CFD trading account types
- Choose the trading account that suits your trading best
- CFD trading basics
- Learn the core principles of trading the financial markets using CFDs.
- CFD trading psychology
- Discover the five rules of thumb to mentally master the stock markets.
What is forex trading?Forex trading is the buying and selling of currencies on the foreign exchange market with the aim of making profit. Forex is the word's most-traded financial market, with transactions worth trillions of dollars taking place every day.
What are the benefits?
- Go long or short
- 24-hour trading
- High liquidity
- Constant opportunities
- Trade on leverage
- Wide range of FX pairs
How do I trade Forex?
- Decide how you'd like to trade Forex
- Learn how the forex market works
- Open a Skilling CFD trading account
- Build a trading plan
- Choose a trading platform
- Open, monitor and close your first position
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