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The Advantages of CFD Trading

The Advantages of CFD Trading

The main goal when trading is to execute the most accurate trades possible, with the highest chance of making a profit, and the lowest level of risk involved.

But there are a wide variety of ways this can be achieved.

Various traders adopt different strategies to create a more successful trading experience.

Among the many different trading styles, one of the most commonly used amongst seasoned traders, is trading contracts for difference (CFDs).

CFDs come with risk, as with any investment, but can also bring a range of benefits to your trading journey.

In light of this, this article will take you through what CFD trading is, as well as the different advantages which come with incorporating it into your trading portfolio.

What is CFD Trading?

CFD trading involves the purchasing of contracts (units) on an asset, speculating on its movement in the market, based on the value of the underlying asset.

With traditional trading, you would take ownership of the underlying asset, and receive a profit when your asset is sold at a price higher than what you bought it for.

With a CFD position however, you do not own the underlying asset, and can speculate on both a rising or falling market. This position you take can either be long (buy) or short (sell).

In order to gain a profit from your trade, you need to be as accurate as possible with your speculation on the underlying asset’s movement.

For example, if you opened a long position and the value increased, you would make a profit – and vice versa, if the value fell you would receive a loss.

The short position works the same way, except you gain a profit when the asset’s value falls.

CFDs can be used on a variety of instruments and markets around the world – for example, if you wanted to start trading AMC shares on the stock market, or a particular currency pair on foreign exchange (forex).

What are the Advantages?

There are many advantages to using CFDs. These include, but are not limited to:

Hedging Your Losses

The main advantage of CFD trading is that you can manage the risk involved in your trades, by hedging against your losses.

With traditional trading, you’re only able to gain a profit on a rising market, closing your position when the asset’s sell price is higher than it was when you opened the trade.

However, with CFDs, you can profit from a falling market with a short position, where you sell the assets with the promise to buy them when you close. The prices are lower than what you sold for, so results in a successful trade.

If you were trading traditionally with a particular asset, you can open a short CFD position, so should your first trade be unsuccessful, you can gain back some of your losses by profiting on the falling market.

Risk Management Tools Available

CFD trading is also beneficial due to the risk management tools you can use.

Once you choose an expert trading platform, you’ll find a range of risk management tools which can help you secure a more successful trading experience.

For example, you can set automatic orders on your trades, which will help you set a limit where any trades will automatically close, should they pass this limit.

This means should you incur losses reaching this set limit, your position will automatically close for you, to stop your losses amounting to a detrimental level.

The Use of Leverage

CFD platforms can also offer the chance for leverage trading.

This is where you use less amount of capital to open a position but gain much greater exposure to the market compared to what you deposited.

For instance, a leverage ratio of 1:10 would mean you can deposit £1,000, and trade CFDs on an asset worth up to £10,000.

This is beneficial for increasing the amount of profit you can gain from a successful trade.

But note, leverage can also increase your losses, as this will be calculated against the leveraged amount, just like for any profits made.

Now that you know just a few of the many advantages it offers, you may want to include CFD trading in your trading portfolio.

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