CFD trading has become an integral part of Financial Spread Betting (FBP) strategies. Essentially, in CFD trading, a derivative contract for difference is an agreement between two traders, usually defined as “buyer” and “seller”, wherein the buyer is obligated to pay to the seller the actual difference between the market value of a particular asset and its current fair market value.
CFDs are leveraged contracts, meaning that higher amounts of CFD trading margin can be obtained by increasing the CFD’s size. However, this leverage does not come without its disadvantages.
One of the major advantages of CFDs is their leveraged nature. This leverage enables CFDs to provide greater levels of financial versatility for CFD trading investors. In other words, although CFDs can represent relatively small amounts of risk per trade, there are still significant advantages that outweigh this small amount of risk.
Leverage allows CFD investors to enjoy a greater potential return on equity and increased liquidity for the financial markets. Leveraging also allows CFD traders to obtain higher spreads on financial instruments and allows them to take advantage of changing market conditions faster than conventional CFD trading south africa would allow.
Another advantage of CFDs is that they offer flexibility. CFDs allow CFD trading participants to hedge against price changes in particular assets daily. CFD trading is generally executed within the same broker-dealer network as conventional CFD trading, and so it is very easy for traders to switch from one trading day to another if they wish. Furthermore, CFDs do not have to be traded with the cash in your account; rather, you can hold them in a bank account that offers flexible and reliable deposit features.
The benefit of hedging is most visible in long-term CFD trading. Through this strategy, you protect yourself from any negative impact of changing market conditions. One of the most common forms of CFD trading is ‘hedge-hinge’ – which means you trade one asset in a counter position and, in the event of a gap opening up between the market rates and the strike price of that asset, you trade it in the direction of the gap.
If there is not enough activity in that position, you stop trading at that point and wait for some time until enough of the asset has been bought back into the market to cover the gap – and then continue trading originally.
By holding onto an asset for such a long period, you are protecting yourself from fluctuations in prices and therefore minimizing your risks. This strategy is used by companies who manufacture machinery or raw materials that have long-term value and are not worth putting on the commodity trading floor.
When you use a CFD trading platform, it will automatically close your positions when the market moves against your position. It does this by selling out your positions at a pre-determined price. Since the CFD trading platform is designed to offer low risk and leverage to new traders, it does not offer protection from market movement – so you need to be very careful.
