CFD trading is extremely fascinating and why it has captivated millions of users, experienced traders, and only beginners, but this method of trading hides many pitfalls. We look at what are the risks and dangers in trading CFDs and especially how to avoid them.
What are CFDs?
CFDs or contracts for differences are financial instruments that allow the trader to invest in the market in a flexible and dynamic way. Through CFD trading, investors can trade on the price fluctuations of an asset without the need to actually enter that market, therefore without actually owning the underlying instrument.
CFDs practically replicate the performance on the markets of stocks, shares, ETFs, futures, stock indices, commodities, and Forex, allowing investors to operate on financial scenarios around the world and with an enormous capacity for diversification of their portfolio.
Contracts for difference, therefore, resemble binary options, but it differs from them in that it uses, from a technical point of view, the same mechanisms as a high-level financial transaction for which, usually, it is necessary to use a market broker. On the other hand, through an online CFD broker, it is possible, with little effort, to be able to invest and build your own financial strategy.
The market niche proposed by Forex brokers offering Contracts-For-Difference is extremely innovative, flexible, and safe, with interesting earning opportunities and a limited capital expenditure that is always under control.
Risks and dangers in CFD trading: the choice of the broker
The online brokers are the brokerage firms that allow you to buy and sell securities online through CFD trading.
The platforms online trading became popular in the late ’90s, thanks to the advent of the internet, has allowed having immediate access to the prices of financial instruments in real-time and the opportunity to invest lower cost than traditional investment methods. To attract users and retain already registered clients, all brokers offer many trading tools, such as technical indicators that give real-time information and help in research and decision making.
Online brokers have many advantages; clients can have more flexibility and control over their portfolios and trades. You can log into your account or trading account at any time, even if the markets are closed. The biggest advantage of trading with an online broker is the low cost of commissions compared to traditional brokers.
The most important thing to consider when choosing the trading broker to use is the presence of certifications and regulations of the same through the major control bodies such as the National Commission for Companies and the Stock Exchange (CONSOB), the Cyprus Securities and Exchange Commission (CySEC), the Financial Conduct Authority (FCA). Moreover, the platforms are obliged to comply with the directives issued by the Markets in Financial Instruments Directive (MiFID).
So the first thing to avoid scams is that the platform is regulated and certified. Therefore, do not rely on fraudulent platforms and not registered with regulatory bodies.
The Trading CFD is not a Scam
Most people, when they hear about CFD trading, think it is a new scam that can be found online but actually, it is not quite the case.
Until recently, these financial maneuvers were carried out by a lucky few in a direct physical way, but with the arrival of the internet and the creation of trading platforms, this market has been made available to practically everyone.
We do not hide from you that; however, online, you will find many people who take advantage of this novelty to put their scams into practice, but if you follow some simple tips, we will teach you to unmask them so as not to fall into their traps.
As we said, there are, mixed with the legal ones, many pirate platforms, but by carrying out simple checks, you will be able to recognize and avoid them.
Just carry out a little research on the sites opened by the control bodies trying to find the company you are interested in; if this is present, then it will mean that it is 100% legal, and you can use it to make your investment maneuvers.
The financial leverage
Pay close attention to the Leverage Tool.
If the funds at your disposal are not many, logically, you will not have many possibilities for financial investments. In this case, you should seriously think about using leverage.
Now let’s see an example to try to make you understand how it works:
You decide to make your first investment, and your available capital is only 100 euros, logically. If you make the investment using only your capital, the profit will be very low, but if you decide to use leverage, then you will have the opportunity to make an investment with much higher capital than you currently have.
The trading platforms offer various levels of leverage but let’s say that you decide to use the one with the factor 1: 100, it will mean that you will have the possibility to invest a capital of 10,000 euros (100×100).
You will certainly have understood that the financial leverage from the possibility of investing a greater capital and consequently of receiving a higher return but be careful because the level of risk also increases.
So our advice is to use leverage but to first study a good strategy that can offset the risk factor.
The importance of technical analysis in CFD trading
The first thing a Trader must do to get to the point of carrying out winning investment maneuvers is to learn to know in depth all the elements that characterize technical analysis.
Only in this way will you be able to understand the precise moment in which you will have to open a position because it is not enough to think that online trading is a job with easy earnings without bearing in mind that there is an intrinsic analytical factor.
To date, technical analysis is used by most of the traders who use it to be able to predict as accurately as possible the various price changes that assets present within the stock markets.
There are various types of technical analysis; the most important are Fibonacci charts and Elliott waves. Both of these methods are based on the theories that were launched in the early twentieth century by Charles Dow, one of the most important world economists.
The basic fundamental discovered by Dow was that there are predetermined trends that over time repeat themselves and are the following:
- Support and resistance lines;
- Double Maximum and Double Minimum Figures;
- Moving averages;
- Flags;
- Head & Shoulders Inversion Figures;
- Pennant;
Conclusion
Online trading implies that every trader may be in a situation of receiving huge gains but could also be in a situation of suffering a large loss of capital, and from a psychological point of view, they are two factors that should not be underestimated.
So, before starting this journey, set yourself some goals and try to understand what you are willing to do to be able to achieve them; only in this case will you be more prepared for the various situations that may happen to you.
