Contracts for difference are valuable trading tools that can enable even a minor investment to produce significant capital gains within a short period of time. Some of the primary advantages associated with these instruments include:
- Margin trades to maximise capital.
- The presence of stop-loss and limit orders.
- Access to a wide variety of underlying assets.
- Profits from both rising and falling market positions.
While all of these qualities are certainly not to be taken lightly, there are some important strategic concerns in order to maximise one's profits during 2016. Let us take a look at how this can be accomplished.
Understanding the Concept of Margin Trades
Margin trades are one of the key aspects of a CFD position that should be appreciated. By investing only a portion of the total value of an asset (and not physically owning this holding), the trader can secure the total sum. Should the position move in the predicted position, one's overall profits will be massively increased. However, all that glitters may not be gold. Losses can equally outstrip one's initial investment levels. The investor will then be required to pay for the difference; a potentially detrimental situation. Trading on margin should only take place when an innate understanding of CFD fundamentals has occurred.
Long and Short Positions
As mentioned previously, a CFD holding can be used to accrue profit when one correctly predicts where the value will head. The main advantage here is that income can be generated even if the price falls. This is in direct contrast to many other trading strategies. One is said to take a long position when the underlying value is expected to rise within a given period of time. A short strategy is under the assumption that the price will fall. So, CFD traders can enjoy wealth even when others have taken a bearish stance in regards to the markets.
Interest rates will apply for some CFD holdings; particularly if they are maintained for a lengthy period of time. Long positions that are held overnight will be charged interest while short positions will be paid interest. This is an important difference to note. Also, these rates change daily and are normally determined by the current LIBOR figures. Calculating the interest attached to a certain position can help the trader to better understand how much profit (or loss) is associated with their holding. Let us not forget that this interest is included alongside any fees and commissions that apply.
2016 should prove to be a very influential year in regards to electronic CFD trading. Those who are hoping to build a reliable source of independent wealth should seriously consider a venture into this lucrative marketplace using a platform like CMC Markets. It is nonetheless vital to appreciate the ways in which CFDs function as well as to know which strategies are the most appropriate for one's unique personal needs.