How To Become a CFD Trader
You have probably heard people talking about how much money can be made as a CFD Trader. Becoming a professional CFD trader will require a lot of patience and practice. In this article, we will show you how to get started and also provide a list of some of the most successful traders of all time for inspiration!
What Is CFD Trading?
Contracts For Difference (CFDs) are instruments which allow traders to speculate on an underlying asset, without ever actually owning the asset in question. Instead, a contract is established between the trader and their broker whereby they agree to exchange the difference in value of the asset between the date of the contract opening and closing.
Simply put, CFDs provide traders with an opportunity to profit from the increase, or decrease, in the price of a financial asset. These assets can be shares, commodities, Forex currency pairs, cryptocurrencies, bonds and much more!
How Does CFD Trading Work?
You may find yourself wondering exactly how CFD trading actually works in practice. The best way to illustrate this is by using a simple example.
Let's say the current price of gold is USD 1,700 per ounce and you believed that this price was about to rise. In this circumstance, you may choose to open a buy (or “long") trade with your broker using your trading platform.
If the price of gold then rose to USD 1,750 you could close your trade and make a profit of USD 50 per ounce.
If, on the other hand, the price of gold fell to USD 1,650 and you closed the trade at that point you would make a loss of USD 50 per ounce.
Source: Admirals MetaTrader 5 with MT5-SE Add-on Gold Daily Chart (between 23 December 2015 and 12 June 2020). Accessed: 12 June 2020 at 12:32 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
How Can I Profit When Prices Are Falling?
As mentioned above, when trading CFDs it is possible to benefit even when prices are falling in a market.
Sticking to the same scenario where gold is at USD 1,700 per ounce, in a situation where you think prices will fall you would simply choose to open a sell (or “short") trade with your broker.
In this case, if the price of gold rose to USD 1,750 you would lose USD 50 per ounce but if the price fell to USD 1,650, you would make a profit of USD 50 per ounce.
How Can I Become a CFD Trader?
Modern technology has brought trading within reach of the general public, demystifying previously complex markets and offering flexible and accessible trading options to anyone with an internet connection.
If you are interested in becoming a CFD trader, the first thing you need to do is choose a regulated broker who offers CFD trading. Once you have chosen your broker and downloaded their trading platform, you will need to choose a trading style, pick an asset and decide whether you think that asset is going to go up or down in price.
Choose Your Style
Trading styles are defined by your time-horizons and the length of time that positions are held. Your choice of style will depend largely on your personality, your attention span and how intense you want your trading sessions to be. Typically, the shorter the time horizons for your trade, the more intensely you will need to focus during your trading sessions.
Scalping involves holding a trade for, typically, seconds - minutes at most. Day-traders tend to hold positions for minutes or hours - but never overnight. Swing traders look for opportunities that might take several days to develop. Position traders have the longest time horizons and their trades can last for weeks, months - sometimes even years.
Scalpers and day traders may be active for just a few hours a day, looking for and executing opportunities. But during times when they have a position open they are intensely watching the markets to decide when best to close their position.
Counter-intuitively, position traders often spend the least amount of time in front of their screens. They identify trends that might take years to play out and during the times when they have an open position might just glance at their screens once a day to make sure there are no surprising news or price movements.
The style you pick will influence your choice of assets to trade.
Picking an Asset
The FX markets are very liquid and trade 24 hours-a-day, 5 days a week and there is always something happening somewhere. As such, CFDs of currency pairs are popular with traders with a short time horizon.
Price volatility brings opportunities for Scalpers and Day Traders. Most markets increase in volatility around times of economic news - particularly if the content of the news is unexpected. If that sounds interesting, you might want to explore Admirals' Economic News Calendar to both help you choose your market and to help you find individual opportunities.
As mentioned above, CFDs are available on a huge variety of underlying assets: shares, commodities, Forex currency pairs, cryptocurrencies, bonds and much more.
The most important factor when selecting what underlying asset to trade is to pick an area you know well, or one that interests you and where you are prepared to put some work in to understand.
Are you up to date with the latest trends in technology and the companies that sell them? In this case you might try trading CFDs of individual technology companies.
Or are you more of a “macro" person who likes to read broadly about the economy and the different factors affecting it? In this case, it might be better for you to trade FX CFDs, as a country's currency tends to reflect the strength of its economy.
Interested in learning more about trading? Why not register for a free Admirals webinar? In our Trading Spotlight series, three expert traders join us three times a week to take a deep dive into the world's most popular trading topics - volatile markets, beginner's strategies, trading psychology and more.
Simply click the banner below to register today!
Buy or Sell?
Now you have picked your asset, how do you decide whether you should long or short trade the asset? It is important to do your research and plan your trade before taking a position in the market. Utilise charts to investigate the asset's recent development and identify any possible trends.
Once you have got the hang of trading using CFDs, diversify your portfolio by trading across different markets. Any successful trader will tell you that an important part of minimising risk is not exposing yourself too heavily in any one market. Instead do your research and take a position across different markets.
Top Five Most Successful Traders In the World
To provide some trading inspiration, we have compiled a list of five of the most successful traders in the world, who have generated personal wealths in the billions of US dollars!
Ranked number four in Forbes Magazine's Billionaires List 2020, Warren Buffet has an estimated personal worth of USD $67.5 billion and is considered to be the best investor in history. Known as the “Oracle of Omaha", every position taken through his investment fund Berkshire Hathaway is carefully scrutinised.
His strategy is quite simple, the billionaire invests in undervalued companies over the long term and sticks to sectors and products which he understands, steering clear of high technology and structured products.
Hungarian George Soros is known commonly as the man who “blew up" the Bank of England. Indeed, he bet on the collapse of the sterling by short selling £10 billion, which resulted in the British currency being taken out of the European Monetary System on “Black Wednesday", 16 September 1992.
A former university professor of mathematics, James Simons specialises in quantitative finance. Although less known to the general public than the two investors mentioned above, his investment fund, the Medallion Fund, is the best performing fund in history. Since 1988, the fund has averaged an annual return of 66.1%. His wealth is estimated by Forbes at over USD $21 billion.
A graduate of the prestigious Harvard University, John Paulson built his fortune by betting against (i.e., shorting) subprime mortgages - a trade from which he made, literally, billions.
A great collector of paintings, the North American Steve Cohen has amassed a fortune of nearly USD $14 billion, often by short selling stocks.
Trade With Admirals
If you feel ready to start trading, or this article has provided some extra insight to your existing trading knowledge, you may be pleased to know that Admirals provides the ability to trade with Forex and CFDs on up to 80+ currencies, with the latest market updates and technical analysis provided for free! Click the banner below to open your live CFD trader account today!
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.