CFD trading stands for “contracts for difference”. As the name suggests, this type of trading allows an investor to participate in the price difference of the financial derivatives. However, unlike shares, the trader does not physically own the financial derivatives of a company. The trader simply agrees to exchange the difference between the opening and closing price of a position.

This type of trading is preferred over share trading, since it requires a lower amount of capital. Besides, an investor can reap high profits with a low investment amount. The investor can trade on rising prices by going long, and trade on falling prices by choosing to go short. The change in price of these financial derivatives is a profit for the trader or the investor. There are different techniques of CFD trading, and you must know when to call the shots. In this article, we share some of the important techniques that a trader must know.

Techniques

Hedging: This technique is often used by traders to protect long-term holdings against variable market conditions. It helps in minimizing risk and can be profitable in the long-term. Hedging is a process of holding a cheaper stock for long, and going short on an expensive stock. It reduces large losses in the long term.

Leveraging: A leverage effect can be expected, since the investment amount is relatively lower than the total value of the transaction. You can trade with a marginal amount, and this type of CFD trading is known as margin position. The ratio is usually 10:1, and helps in leveraging your investment.

Stop Loss Position: You can place an order for automatic stop loss. This means that you can exit a trade on the same day of transaction, that is, intraday. With this technique, you can set the automatic stop loss trigger and decide the price at which you intend to stop the losses. Using stop loss and limits is the key to successful trading. Progressive stop strategies, limit orders, and stop limit orders are some effective techniques in contracts for differences.

Apart from using these techniques, as an investor or trader, you must remember some of the golden rules of CFD trading. First, trading is different from investing. When you trade online, do not hold the derivatives for too long without evaluating the market conditions. These are fast moving financial instruments and require thorough evaluation. Second, it is important to book profits. Do not let greed empower your decision taking ability. Take rational decisions and book profits. Remember, the market will not move as per your expectations, it is volatile and you may end up with huge losses.

When you trade online, you must have the entire plan clear in the mind. Moreover, it is important to stick to the plan. Discipline is important. You must know when to enter, when to exit, when to place a stop loss trigger, when to book profits, and when to limit the order.

CFD trading, when executed with these techniques and rules in mind, certainly helps you make big money. Do not succumb to the emotions of greed; be professional with your transactions and book profits on time.