Dipping your toes into trading may not be as daunting as it sounds. Here’s why.

There has been growing interest in trading derivatives such as contract for difference (CFD), especially among a younger generation of traders as they seek new avenues of profit amid an uncertain and low interest-rate environment.

For traders who are used to stocks, entering the world of CFDs can appear daunting initially. But if you are prepared to invest some time learning trading strategies and the basics of technical analysis, CFDs may be an option in volatile markets.

A CFD is an instrument that allows traders to invest in a range of securities, such as shares, indices, FX and commodities, without having to own the actual underlying asset. At the end of a CFD contract, a trader and broker will exchange the price difference of the current value of the asset.

With CFDs, it is possible to make a profit whether the value of the asset goes up or down. If you expect its value to rise, you would take a long position. If you expect it to fall, you would take a short position. This makes CFDs a good option for hedging your stockbroking portfolio, especially in an economic downturn.

Furthermore, CFDs only require you to deposit a fraction of the full value of trade, known as the margin. This frees up your capital and some traders trade shares that they might not want to own but think will perform well in the short term. However, trading with leverage in this manner can be risky if the market goes against you. As the profits and losses of a trade are calculated on the full size of your position, your gains will be magnified and your losses could exceed your initial deposit.

AVOID ROOKIE MISTAKES

With these risks in mind, there are several ways that traders can avoid rookie mistakes and ease their way into CFD trading. One common pitfall that new traders experience is over-leveraging or taking positions that are too large. This can result in heavy losses.

To mitigate this risk, CFD brokers like CMC Markets offer a tool known as a guaranteed stop loss order (GSLO), which lets you determine beforehand the maximum amount of loss you are prepared to take. Traders will be charged a small premium if the stop is triggered. In this way, GSLOs give you the peace of mind that your stop-loss will be executed at the exact price you want, even in the most volatile market conditions.

It’s important to have the right mindset when it comes to CFDs. Unlike traditional securities like shares or bonds, CFDs are meant to be traded on a shorter-term basis. Traders must adopt a different time horizon from what they are used to. This is important, as there are costs associated to holding on to CFDs.

“Sometimes, the shorter-term horizon doesn’t follow fundamentals, so traders have to use other tools to gauge the short-term sentiment surrounding the security. One of the ways to do this is through technical analysis,” said market analyst Kelvin Wong.

THE IMPORTANCE OF TECHNICAL ANALYSIS

Technical analysis is a key part of CFD trading strategy and many traders use both technical and fundamental analysis to make decisions.

Technical analysis is used by traders to evaluate future price movements based on historical price data. Many traders use technical indicators and charting analysis tools to spot potential trading opportunities and suitable entry and exit points.

“Technical analysis may sound like rocket science to the new trader, so at CMC, we provide a wide range of educational resources on our YouTube channel and our website to help them learn this skill,” said Mr Wong.

To prepare new traders for live CFD trading, CMC Markets provides a free, unlimited demo account that allows traders to practise trading on the platform and apply their trading strategies. You can trade across thousands of instruments while making use of CMC Markets’ charting tools, market analysis and 24/5 customer support team.

For this to be effective, however, traders must treat this simulation as if they were using real money.

“Using a demo account is a good way to see how a particular product works, but because it uses ‘fake’ money, some traders don’t take it seriously, which defeats the purpose of using the demo account,” said Mr Wong.

RESOURCES AND TOOLS

Once you are ready to start trading, CMC Markets’ Next Generation platform offers a host of multiple charting features, including a technical analysis suite with 115 technical indicators and drawing tools, over 70 chart patterns, and 12 chart types. These tools, coupled with an intuitive and user-friendly platform, help new traders embark seamlessly on their trading journey.

Traders can continue to learn by making use of CMC Markets’ suite of free educational tools and resources. There are interactive monthly webinars, platform guides and daily insights from its global market analysts.

Find out more about how CMC Markets can help you start your trading journey and sign up for a free demo account.

This advertisement is for information only, not an investment recommendation or financial advice. Losses can exceed your initial deposit. See risk warning/disclosure and other important information on CMC Markets’ website. This advertisement has not been reviewed by the Monetary Authority of Singapore (MAS). CMC Markets is regulated by MAS.