Due to the many benefits of CFD trading, the number of traders who participate in it increases every day. If you’ve already heard about CFD trading but are still unsure about whether to start, let’s talk about its major benefits and the easiest strategy for beginners to start their CFD trading journey.
1. Wide selection of markets and assets
One of the main advantages of CFD trading is access to all the largest financial markets at once – forex, commodities, stocks & indices, and cryptocurrencies. You can have a wide selection of assets in every market, which gives you the opportunity to diversify your portfolio. This is considered a good risk management strategy to prevent big losses.
With Deriv, you have an additional option to trade synthetic indices, a market that is available round the clock, much like the cryptocurrency market. Moreover, all the markets and assets can be accessed within the same platform – Deriv MT5.
2. Opportunity to profit from both falling and rising markets
In CFD trading, you predict the price movement of an underlying asset without buying it. Remember, you’re trading on a contract for difference, not the actual asset. So it doesn’t matter if the price rises or falls; as long as it moves according to your prediction, you may earn a profit. Unlike other trade types, a CFD trade can be opened not only with a buy order (going long) but a sell order (going short) as well, even if you don’t have anything to sell.
Let’s say you believe the price of an asset will go down because the company failed to reach its targets for the quarter, which usually leads to a sell-off – a large number of its shares being sold at a low price. If you place a sell order on its stock CFD, and your prediction is correct, you earn a profit. To execute this kind of trades successfully, it’s important to understand the general logic behind going long and going short in CFD trading.
3. Cost-effective capital utilisation
As CFDs are typically traded on margin, you can use it as an opportunity to build a cost-effective trading strategy. Since you only need to pay a small percentage of the trade value, your budget can be allocated into several trades at once. There is also a stop loss feature to protect you from losing too much of your capital if the trade goes against your prediction.
Plus, you don’t have to pay an additional tax on asset ownership since you don’t own the underlying asset when trading CFDs, which can be a big advantage. Most brokers also don’t charge a commission for CFD trading, making it even more cost-effective.
How can beginners benefit from the advantages of CFD trading?
Professional traders have quite a few CFD trading strategies. Some of them are very complex and require technical knowledge. But, it doesn’t mean that beginners can’t benefit from the advantages of this form of trading. Here is a relatively easy way to start: news trading.
Most financial markets are affected by economic and political events in one way or another. As a result, big announcements are usually followed by big price fluctuations of the related assets. For example, the UK pound has experienced a big drop right after Brexit. And Bitcoin’s price went skyrocketing when Tesla bought over a billion USD worth of it.
Keeping an eye on the big headlines and learning how they affect the prices would be a good beginning of the CFD trading journey. Once you know how to connect the dots, you can start predicting the price movements and benefit from them.
If you’re not confident with news trading, you can opt for trading synthetic market. With Deriv’s synthetics trading, you trade CFDs on indices that simulate real-world market movements but are not affected by world events. On this market, the price movements are randomly generated by a cryptographically secure algorithm and are regularly audited by a third party for fairness.
Whatever market you choose to start, you can do so by creating a demo account to get your practice in before investing any money. Create a demo account with Deriv today, select Deriv MT5 of Deriv X CFD trading platform, and see what’s on offer.
You can also check out our guide on the dos and don’ts of CFD trading to avoid making common beginner mistakes.
Deriv X is not available for clients residing within the EU and UK.
CFDs on cryptocurrencies are not available for clients residing within the United Kingdom