Beginners guide to trading CFDs

Looking for ways to increase your monthly income? Online trading could be a good solution. Finding a job that pays more or switching your career isn’t always realistic. But, a side hustle like trading could improve your quality of life considerably. Saving for a vacation, a car, or your future might become a lot easier. You could put any profits towards existing credit card debts or loans too. Financial health doesn’t have to be a pipe dream.

Of course, trading online comes with its own risks. Tread carefully and learn the fundamentals before jumping in. This quick guide to CFD trading, one popular form available online, should help.

Learn CFD trading

Firstly, let’s break down what CFD trading means. CFD stands for contract for difference. It’s a contract that represents an underlying asset, such as a bond, commodity or share. Traders can use online brokers to trade CFDs. Rather than investing money in a physical product, such as a share, traders take a position on whether they expect the price of the underlying asset to rise or fall. A share, currency pair, or gold, for instance.

This means that they never physically own their selected instrument, like a company share. Instead, they choose to go long (buy) or short (sell), based on the price movements of the instrument their CFD corresponds with. This means that with CFD trading, you could potentially profit not just from rising prices, but when prices are falling as well. If you expect prices to rise, you would buy, and if you expect prices to fall, you would sell.  

Knowing when to buy and when to sell is not easy, of course. Financial markets are unpredictable, with prices moving quickly. There are a lot of influences on these markets. Economic announcements or world events have a strong bearing. Company developments like mergers play a big part in the stock market too. Learn how to use fundamental and technical analyses to your advantage, before you start trading.

Another good rule of thumb is to diversify the assets you trade in, rather than selecting just one group. Most CFDs can be traded across a wide range of products, from currency pairs to commodities.

Even with careful analysis, beginners can still lose money. You can limit this and secure your profits by following some simple rules:

  1. Never put more than two per cent of the capital in your account into an individual trade. For beginners, one per cent is best.
  2. Use stop losses. These help protect your trade and limit losses by automatically closing out your trade at a predetermined price decided by you, if prices move against you.
  3. Track profits and losses to limit your monthly losses, as well as those that might arise per trade.

Most CFD brokers allow you to trade on margin. This means that you can open a trade worth more than the money you deposit in your account. Margin allows you to multiply profits. Conversely, the same applies to losses, which is why risk management is sensible.

To start trading CFDs, you can set up an account with a trading platform. It’s best to practice with a demo account before you get into real trades. Most brokers also provide learning materials where you can educate yourself on the different aspects of trading. While this article provides a brief overview of CFDs, you will need to do further reading if you want to use them as a way to top up your income.