What is CFD trading and how does it work?
Most people get scared by the so many technical terms that they become discouraged even before stepping into the trading octagon. So, let me keep it really simple for you.
CFD trading is similar to binary options. In binary options you have (you guessed it) 2 options to choose from, when placing a bid. But that is where similarities stop. Because, with binaries, you invest your own capital when placing a bid. Let me give you an example. Right now, the price of gold is 1,275.05/oz. If, for instance, you bid $5,000 on gold’s price to reach or surpass the 1,280/oz limit 3 days from now, you are risking $5,000 of your own money.
If the limit is reached, as your bid claimed it would, you win. If not, you lose. CFDs, however, function differently, in the sense that you are not using your own money when placing a bid.
CFD stands for Contract for Difference and it is pretty suggestive if you think about it. What it means is that it represents a contractual agreement between a buyer and a seller in regard to the movements of a specific asset. In other words, they exchange the difference between the value of an asset when the contract is being created and that when the contract closes.
There are 2 key differences between CFD trading and traditional methods, that rely on purchasing an asset, or investing your money into the deal:
1. CFDs function based on margined leverage
What this means is that you only have to invest a small amount of money (a percentage of the asset’s real value, somewhere between 0.2% and 20%, depending on the asset and depending on the broker) to control an asset worth a lot more than that.
This is particularly interesting, because it shows you that the revenue you can get back basically has no limit. And the lower the margin is, the higher the potential gain will become.
2. You are risking less of your real money
I have said it before and I will say it again – It is not about how to make money with CFD trading, but how to minimize or avoid losses. As long as you avoid losing money, you are automatically making money. This is how it works. And with CFDs you are using a margin to control a more expensive asset you can’t buy.
Are you ready to make money with CFDs?
Before stepping into the real deal, let me show you some of the key concepts you need to familiarize yourself with. Understanding these concepts is crucial before breaking down the strategies you need to adopt to become a legit winner:
1. Margin – An investment representing a certain percentage of the real value of a given asset. Margins could go as high as 25% in some cases and as low as 0.2% in others, with the return rate varying accordingly – lower for high margins and higher for low margins.
2. Leverage – It represents the act of borrowing money to control a higher financial position. If you have an asset worth $50,000 and use a 10% margin to control it, you invest $5,000 of your own money and $45,000 of your broker’s or a bank’s money. This act is called leverage because you are using a low financial force to move a higher financial weight.
3. Hedging – The hedge is basically an insurance policy in case things go haywire. It is a strategy used by most CFD traders to minimize or even cut down risks completely (although highly unlikely).
4. Spread – The spread represents the difference in value between the buy price and the sell price of a certain asset. You have seen spreads on countless occasions so far. Take the EURO/USD pair, for instance. CFD brokers will display the exchange rate in 2 distinct sections: BUY and SELL or BID and ASK. And in the BUY/BID section you will have 1.16648, while in the SELL/BID section you will have 1.1665. The spread, in this case, is 0.00002, because that is the difference of value between the 2 prices.
With these in place, you probably have a pretty good idea about what you are getting yourself into. I have to tell you, right from the get-go, that the CFD trading business is a lot safer and a lot more seductive to the majority of traders, both beginners and pros alike.
But, as you may expect professionals are making the most out of it. And, since we are here, let me break down some of the myths related to the trading industry, as well as to the CFDs in general:
– “In general, people are losing more money than making” – Obviously, not true. If that were the case, the trading markets would have been emptied by now. In reality, people are making more money than losing. You know how I know that? I know it because of 2 reasons: the data consistently shows traders increasing their capital and I know the strategies you can resort to in order to increase your chances of winning.
– “CFDs are dangerous and, as a beginner, you have no chance” – False. And it is false for 2 reasons: CFDs are actually quite simple to understand and there are a lot less money to risk during the trading process. If anything, traditional trading is way riskier, because it is more complex and complicated and it takes higher investments to get higher return rates. You don’t have to be a pro to understand and use CFDs. You only need to know the basics.
– “The leverage is equally profitable and dangerous” – That is…well, false. Leverage is only as profitable as it is dangerous if you trade as you would throw the dice. As long as you use your knowledge, though, things will change completely. Luck has very little to do with it, in case you were wondering and, yes, you can make leverage work in your advantage in most of the cases.
– “You have to have money to make money” – That is true, but not in the sense meant by the quote itself. Because this preconception suggests that you need a lot of money if you want to make an equal amount or more. That may be the case with traditional trading, but not with CFDs. So, yes, you do need money to make money, but nowhere near as much as the quote suggests.
So, based on what we know so far, is CFD trading worth it? It only depends on what your goals are. Do you want to make money with CFD trading? Then, yes, it is totally worth it. As long as you prepare for it properly.
What I mean by that is that there is a system that will allow you to boost your chances of winning so much that there will virtually be no risk of losing money. All you can do is win.
I can’t speak in percentages, but if I were to name one, I believe 90% is an actual realistic figure. I believe you can increase your chances of winning and making money to close to 100% in 90% of the cases. Not only that I believe it, I know it.
And with this, we move on to the next section of the article – the actual strategies.
CFD trading strategies to make money
I almost know what you are thinking right now. I bet it is something along the lines of “If these strategies are so revolutionary and so effective, why isn’t everybody using them?”. If this is what you are thinking, here is what I have to say about it:
- – A lot of people are already using these strategies and make a lot of money as a result
- – They are not revolutionary at all, they are just based on common sense, hence their overall effectiveness
- – Not all people know about them, because not everybody takes time to actually learn how the trading industry works. As a result, they will lose a lot of money
As you can see, there is one thing I believe stands above everything else and that is knowledge. The more knowledgeable you are, the more likely you will get rich fast.
With this out of our way, here are the most effective CFD trading strategies you can use to make money almost guaranteed:
1. Choose your asset carefully
This is a common sense advice, but, in all fairness, all are. What I mean by this is that what you need is a strong market tip. You can get these either from other traders, from your own broker you are working with, as a professional advice or by analyzing the market and the news on your own.
You need something big and steady. Here is a real example of that:
In 2010, Amazon has opened a retail headquarter in Seattle. According to Amazon officials, corroborated with other sources as well, the huge online retailer’s contribution to the city’s economy surpassed the $38 billion mark by 2016. This makes it a huge success.
Now, Amazon has just announced that it has plans for opening a second location, this time even bigger. The initial estimates speak of a $5 billion facility and over 50,000 new highly paid work places. An estimate of 240 cities have placed a bid, as Amazon has announced an area of interest spanning over 54 states, territories and districts across North America.
Given this context, what should you do? If your answer is “Buy”, you are correct. Because, as you may have already guessed it, Amazon shares are bound to increase over the following period consistently.
In this regard, you need to keep in mind 2 aspects:
- Be sure the news are rock solid and that it is unlikely that Amazon would change its mind – Because even the whiff of such a prospect could drop the shares in value considerably, causing you to take a serious loss.
- Look for additional opportunities – The fact that Amazon is opening a $5 billion retail shop is huge. So huge that it will most likely affect businesses around the location. This means that, as soon as you find out where the Amazon’s new headquarter will open, you can find other CFD trading opportunities in the area as well.
2. Monitor the market 24/7
If you aim for making money, this is a must. The smallest fluctuation in the trading market could spell disaster for you and that danger is multiplied considerably when talking about CFD trading. I know I said that the leverage in negligible when it comes to the risks involved, but that is only true if you take the right course of action.
If you approach the CFD trading as rolling dices, the leverage will most likely bury you.
3. Always go for short trades
And when I say always, I mean it. Because, with CFD trading, there are 2 types of trading approaches: long term bids and short term bids. The long term bids are only a viable solution when talking about either jumping into a rock solid deal or having enough money to play with. In which case, losing won’t be a problem.
But since you have no money to lose and your goal is to make them, not waste them, my advice to you is to always go for short term trades. There are 3 reasons why that is the more educated and overall more profitable option:
- You won’t have to pay the overnight fees that come with CFD trading
- The overall risks are lower, since there is less time for the unexpected to kick in
- You can use lower margins, thus, controlling a heavier leverage and getting a higher return rate. On long term trades, using lower margins is simply too risky.
4. Always play for the lowest margins possible
Here is the deal. Going for lower margins isn’t always a good idea, especially if you are dealing with a highly volatile asset and you are uncertain of the outcome. Because using a lower margin, say 0.5%, only means that the leverage you will be controlling is 99.5%, which is huge.
If things don’t go your way, your losses will be amplified considerably. However, I prefer bidding on lower margins, because I get to invest less of my money, the return rate is higher and I always use this method on short trades and only when I am positive of the outcome.
What I have highlighted there is the foundation of making money with CFD trading.
5. Always have stop-loss orders in place
This is another key aspect of significantly lowering the risks of losing money. What this implies, virtually, is that you need to check with your broker and put stop-loss orders in charge of your trades.
Guaranteed stop-loss orders are even better, because they represent the warrant of closing your positions if the value of a certain asset reaches a specific number chosen by you. This is a great strategy of both securing your profits and minimizing the losses, in case they do occur.
6. Keep track of your activity
This is the key tool to use if you want to evolve in the right direction. And, as far as I know, it is the one crucial aspect that all pros are using regularly. In essence, this is about recording every aspect of your activity, like:
- What asset did you traded?
- What was the margin used?
- What was the leverage?
- Did you use a long term trade or a short term one?
- How did the asset behave?
- If your prediction was accurate, why? If not, why?
- What was the outcome and what was the return rate/how much did you lose?
These are just some of the things you need written down and I am sure there are countless others that are equally important. This will help you draw a trading profile of yourself which, with time, will tell you what to keep, where to improve and what to leave untouched.
These are the 6 best trading approaches you can learn if you ever want to get rich with CFD trading. And, trust me, you can. I am not saying this as part of the marketing tool and you can check the truth of this statement at any time. All you have to do is to open a new tab in your browser and go check all the rich traders on Wall-Street.
Do you think they have made it to where they are because of sheer luck? If that is what you think, you have right here the proof you needed that you will never reach to their level. Because your future success lies in how you approach the trading business mentally. Which brings us to another important section of the article.
But before we get there, I want to clarify something I said earlier. I said “here are the most effective CFD trading strategies you can use to make money almost guaranteed”. As you can see, I have highlighted the words “almost guaranteed”. This is because there is no such thing as 100% win strategies. Beware of the brokers selling you this lie.
Almost guaranteed means precisely that – By using these strategies, you will considerably increase your chances of winning. Mathematically speaking.
Now, for the next part, we are going to analyze a different aspect of the trading game.
Entering the mindset of a winner
“Be water, my friend”, Bruce Lee once said and the echo of his teachings goes beyond the realm of martial arts. Becoming water means adjusting your mindset according to the environment you operate in. In other words – adapt, improvise, innovate, improve and overcome.
With this philosophy in mind, here is the key to success you have been waiting for.
– Never trade with your emotions – CFD trading is a mathematical game. The moment you allow your emotions to take over, you will start losing. Only count on solid information when bidding and set aside all your biases, as they do you no good.
– Feed your confidence – The problem with most beginners is that they start the trading business with high expectations and go down with a bang. Don’t expect to make a fortune with the first trade. Instead, go for small increments and set smaller, more realistic goals. This will boost your confidence considerably as a result. Also, do not fall back because you have lost a trade or 2. Just do your homework and adopt a better technique next time. Persistence is the key.
– Do not force it – Don’t test your luck and, more importantly, don’t test your bad luck. If you have a poor trade, cut the losses and close your position. You do not want to mess with the leverage. Take what you can and close the deal, regardless of the outcome. This works better if you set goals in advance and close immediately as you have reached that goal. Or as soon as you see any sign of the trade going against you.
Get rich trading CFD – As real as it can get
No matter what you are told, there are no shortcuts to success. Success is a matter of hard work, determination and knowledge and this goes for every aspect of life, not only CFDs.
And with regards to CFD trading, the same rules apply. Yes, you can make money. And, yes, you can make money with CFD trading without being a professional. All you need is to have a few strategies in mind and adapt your approach accordingly.
In my view, CFDs are probably the hidden gem of the trading industry. They are literally a hidden diamond mine that only the knowledgeable harness on a regular basis. The only reason why most people either don’t know about CFDs or avoid them intentionally is because they lack the knowledge.
But not you. Not anymore.