Why Trade CFD’s
CFDs are regulated investment products that offer investors a wide range of benefits. Here are why CFDs are tailor-made for the modern investor seeking an easy and potentially highly profitable investment product:
Trading with leverage opens up a whole new world of possibilities for investors. It effectively means that traders are only required to place a margin so as to control an entire trade position. For instance, a leverage level of 1:100 will mean that a trader only needs to place a margin capital of $1,000 to control a $100,000 trade position! While leverage boosts potential profits, investors should be aware of its dangers as well, as it can magnify potential losses as well.
Going long or short
CFDs are an agreement between an investor and the broker for the difference in contract value between the start and end of the contract period. This means that no matter the direction of the market, investors have opportunities for making profits by going long or going short.
CFDs are available for practically every financial asset in the world. At OceanTrade, you can trade hundreds of CFDs of a wide range of assets such as Currency Pairs, Stocks, Indices and Commodities.
Low Trading Costs
CFDs provide exposure to financial assets without the obligation to buy or own them. The idea of a CFD contract is for two parties to exchange the difference between the purchase price and the sale price of the contract. It is essentially a contract on the price movement of the underlying asset. This effectively reduces transaction costs. On most CFD trading platforms, the only costs are spreads (the difference between the bid and ask prices) – there are no extra commissions or associated fees to open or liquidate your transactions. In any investing activity, lower costs can only enhance your profitability.
Round the Clock Trading
CFDs are not traded in centralized locations or exchanges. This means that they are not subject to defined trading hours. CFD investors can open, close or manage trades of their favourite assets even ‘out of hours’.
Managing Risks when Trading CFDs
Successful CFD trading is all about managing risks. Here are some tips for limiting risk exposure while enhancing your profitability when trading CFDs:
Risk Management Tools
The OceanTrade CFD platform offers risk management tools such as Stop Loss and Take Profit orders that automatically close orders to manage your risks. Stop-loss orders cut your losses at a specified price point when the market goes against your prediction. Take profit orders enable you to book and lock in your profits at a specified price point when the market goes according to your prediction. These risk management tools help traders to shield themselves against the inherent market risks of trading CFDs.
The danger of high leverage is clear. But, leverage is also why many investors trade CFDs. It is therefore important to choose a leverage level that is ideal for your investment needs. Most OceanTrade traders are advised to use a leverage of around 1:30 but be sure to have an honest discussion with your personal account manager so you can work out the optimal leverage level for your investing goals.
When trading using a standard lot size, one pip price movement is usually worth $10. For instance, if the price makes a 100-pip movement in your favour when you are trading standard lots, you will earn $1,000 (100*$10); the loss would be $1,000 if the price moves against you. It is important to always trade an order size that will not put at risk more than 5% of your capital on any one trade. As well, you can vary your order size depending on the type of asset traded or trading times. Volatile assets should be traded with small order sizes, while less volatile assets can be traded with bigger order sizes. During volatile trading times such as the New York trading session, investors should trade with smaller order sizes; while bigger order sizes can be traded during slow-moving trading hours such as during the Asian session.
It is clear from the above that CFDs offer extensive benefits, despite some of the risks. As an example, let’s assume you want to trade Netflix stock and you have $4,000 of capital to invest. If the shares are trading at $400 per share, you would be able to purchase 10 shares via a traditional stockbroker. If the stock went up 10%, you would make $40 per share or a total of $400 in profit. Now, if you were to trade a Netflix CFD with OceanTrade with leverage of just 1:10, you would, in essence, be able to buy 100 shares, which means the same 10% rise in the share price would result in a profit of $40*100 = $4,000. Obviously, this is just a hypothetical example. Now, to manage your risk, you might put a Stop Loss order at $390, which if triggered will result in a loss of $10*100=$1,000. What this means is you would be risking losing $1,000 of capital for a potential profit of $4,000. This is a typical risk/reward ratio that must be considered.
Effective trading, especially with CFDs is all about profit enhancement and risk management. There are no investments that offer zero risks, but as explained above the rewards often outweigh the risks. It is vital to learn and implement risk and money management strategies when trading CFDs. To learn more about this, be sure to visit our education centre.