Traditional stock and commodity trading is becoming outdated. Experienced traders are now seeking new ways to access the financial markets and generate profits. One standout option is Contract for Differences (CFD) trading. CFD is a financial instrument that allows traders to speculate on the prices of numerous financial assets without actually owning them.
This advanced trading model opens new opportunities for both novice and seasoned traders. Here are four reasons that make CFDs an attractive option for experienced traders:
- Access Multiple Markets
Unlike traditional trading, which is only limited to one asset, CFDs allow traders to access various markets. This includes:
- Stocks
- Commodities
- Indices
- Forex
- Cryptocurrencies
- Exchange-Traded Funds (ETFs)
- Treasury Bonds
With contracts for differences, you don’t have to limit yourself to one asset. You can capitalise on price movements across different sectors.
- Hedging
Hedging is one of the best ways to limit investment risks. Investors hedge an asset by opening a position in the opposite direction, aiming to protect themselves from adverse price movements. CFDs can act as effective hedging tools. Traders have the freedom to go long (buy) or short (sell) without owning the underlying asset.
A typical CFD hedging strategy looks like this: A trader has a long position in a stock, but anticipates a potential market downturn. To manage risks, they open a short CFD position on the same stock.
This can be especially beneficial during uncertain market conditions and economic instability. Instead of selling all your assets, you can use CFDs to create a temporary hedge. Hedging will also help you maintain a diversified trading portfolio.
- Leverage
Another reason why experienced traders are turning towards CFDs is deep leverage. Traders can control greater positions with a small capital. Two concepts are worth mentioning here:
Margin: It is the amount of capital needed to open a CFD position. It is the percentage of the total value and can vary depending on the broker’s policies. For instance, if you’re trading a CFD worth $10,000 and the broker requires a 10% margin, you only need to deposit $1,000 to enter a trade.
Leverage Ratio: It reflects the relationship between your capital and the full trade value. In the above-mentioned example, a 10:1 leverage ratio is used.
To reiterate, you don’t have to pay the full value of an asset upfront. Seasoned traders capitalise on this opportunity as they’re trained to precisely monitor positions and implement stop-loss orders.
- Effective Risk Management
CFDs provide traders with ample opportunities to manage risks. Here are the two main risk management strategies CFD traders use:
Stop-Loss Order: It automatically closes a trade when the market price reaches a set limit. The security is sold at the current market price, saving you from any losses.
Profit Sizing: It is the process of deciding how much capital you can risk on a single trade. This is often a small percentage, such as 1-2%.
With proper risk management, experienced traders can scale positions without exposing themselves to excessive risk.
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