Are you curious as to the benefits are of CFDs? We have you covered. This article focuses on what CFDs are, how they work, and how to trade them.
A brief overview
CFDs are a relatively new invention when it comes to trading in London. First created in the 1980s, they did not introduce them onto the primary stream market until 2001.
However, since then, they have overgrown in popularity because of their ease of use and low barriers to entry.
CFDs are financial derivatives that allow traders to speculate on the movement of an asset that they do not own.
CFDs are usually traded over the counter but can also be traded on the exchange via equity markets.
The benefit of using CFDs as a trading strategy in London is that they offer enormous leverage without putting down significant collateral or margin.
It allows you higher levels of exposure to the market with lower capital outlay – perfect for beginner-level day traders who may lack experience with high amounts of risk management.
Fees related to holding positions overnight often apply.
If your investment goes into negative figures, then your broker will automatically liquidate your position at market price – this is why it’s necessary for any trader beginning CFD trading to have a comprehensive knowledge of the risks involved and how to manage them.
Many CFD brokers offer free demo accounts along with their live trading platforms; this means you can test out new strategies at no cost before committing money to see your ideas play out in real-time.
Not only that but because CFDs are traded on margin, there is also the potential for significant returns if you know what you are doing.
Furthermore, using CFDs as a strategy can be applied to virtually any asset, making them highly versatile in trading pairs.
However, here are some key points that apply specifically to how CFDs can benefit your trading style in London. That’s why CFDs are so great.
Buy and sell quickly
You can buy or sell them in just 30 minutes, with brokers offering flexible trading conditions to suit the way you trade.
So whether you’re a scalper looking for smaller quick gains, or a longer-term investor hoping for more significant-excellent returns, CFDs can accommodate your needs.
Types of accounts
There are many types of accounts at your disposal when using CFDs in London; Standard, Mini and VIP accounts, amongst others.
Although they all rely on margin (essentially borrowing money to make investments), the limits of each type vary greatly depending on how much experience you already have in trading.
These gaps can be seen by comparing their leverage values; where standard account leverage is only 1:30, it is possible to trade with up to 1:500 leverage on a mini account.
Limit Orders are another feature of CFDs that you don’t get with other forms of trading in London, enabling traders to set their desired purchase price before executing the trade.
It adds extra control over your trades, allowing you to leave nothing up to chance.
Besides limit orders and using preset Stops Losses and Take Profits, Trailing Stops can be set so that the market moves against your desired direction.
It will move back towards your entry price by the amount you have specified before exiting the trade.
Entry and exit prices
When you trade CFDs in London, you only ever pay the difference between your entry and exit prices.
It can be very beneficial if, for example, you bought at $0.30 and sold at $0.40; You would make $0.10 on that trade which is equal to a 20% return on your investment, whereas, with traditional trading methods, this is not possible.
Of course, it’s not all just pure profit, as purchasing CFDs does require an initial deposit to put into escrow before making trades; however, once done, there are no further charges or administration fees.
Choosing the right broker becomes crucial depending on how you choose to trade using CFDs in London because ultimately, they will determine how much (or little) it costs you every time you make a trade.
You can visit our website for more insights into trading terms such as moving averages, trends, options and many more.