The world of trading is very intriguing. Making money from your laptop or phone, from anywhere in the world, sounds like a good deal, right? It sure is! Among the trading possibilities, CFD trading stands out as one of the most popular ways to trade a variety of different assets: stocks, commodities, and currencies, all from one platform.
But if you’re going to explore the world of CFD trading, you need to know what you’re getting into. Equip yourself with adequate knowledge and you’ll already be ahead of many other traders.
In this article, we’ll explore what CFD trading is, whether it’s good for beginners, and cover what you need to know before starting.
What CFD Trading Actually Means
Before we tackle the question of whether CFD trading is good for beginners, it’s important to understand exactly what it is. CFDs stand for Contract for Difference.
When you're trading CFDs, you aren't actually buying an asset directly. What you are doing is speculating on the price movement of the underlying asset, profiting from the difference between opening and closing prices.
In other words, if you were trading a CFD on Apple stock, you would not buy shares of Apple and be a part owner (as a normal stock owner would be). Instead, you open a position – either short or long based on whether you think the asset price will rise or fall. Then, if you’re correct, you make money. If you’re wrong, you lose money.
So, in summary, with CFDs, you speculate on price action, without ever owning the asset you’re speculating on.
How CFD Trading Works in the Global Markets
CFD trading involves margin, meaning you put down a portion of the trade value. And the broker covers the rest. This is a concept known as leverage.
Leverage sounds great on paper, and it is. You get to control a much larger position than you otherwise would be able to. For example, you could control a position worth $10,000 with just $500 of your own money.
This is a great scenario if the trade moves in your favour, since your actual ROC (Return on Capital) will be excellent. However, leverage works both ways. So, even a small adverse price movement can result in significant losses that are felt quickly.
Let's say you open a position worth $10,000 using $500 of your own money. If the market moves 5% against you, you’d lose the entire $500 you’ve put down. That's why robust risk management strategies should be a cornerstone of trading, especially CFD trading.
The Real Risks Behind CFD Trading
Before starting CFD trading, it’s smart to at least understand the risks so you know what you’re getting into. The main risk is not specific to CFDs, but more general market risk.
The financial markets are sensitive and subject to sharp price swings. Breaking news, geopolitical risks and political instability are some of the biggest drivers of price action. Typically, these things hit the market without prior warning. So, the biggest risk is simply exposure to these financial markets.
As mentioned, leverage is great for maximizing gains but can also work against you. Add market volatility and leverage together, and you do have real risks. These risks should not scare you away from CFD trading, but they should motivate you to implement effective risk management strategies.
Is CFD Trading Good for Beginners?
Now to the main question: Is CFD trading good for beginners? It’s not just as simple as yes or no.
If you’re going to start CFD trading and be successful, you need a foundation. The foundation should be laid both in theory and in practice. In the next section, we’ll explain how to get started trading CFDs the right way.
Start CFD Trading the Right Way
Before you put money into CFD trading, take some time to educate yourself.
On a basic level, understand what CFD trading is, common trading concepts, how you make/lose money, and learn basic market analysis to understand what causes the market to move (on a high level). Furthermore, understand how leverage impacts your trades and how to calculate the potential profit and loss before entering a trade.
You’ll want to familiarize yourself with the following calculators:
Forex Profit Calculator Crypto Profit Calculator Stock Profit Calculator
The initial investment or minimum deposit for most brokers ranges between $100 and $500, but Seacrest makes this even more affordable, with a minimum deposit requirement of only $50. View our plans here.
Once you’re familiar with CFD trading and the concepts around it, you’ll want to develop your own trading plan. The more detailed, the better. However, this doesn’t need to be perfect before you start and you can tweak it as you go.
On a basic level, you’ll want to consider the following:
- What instruments will you trade?
- What type of trader are you? (Day/Scalper/Swing Trader)
- What are your rules for entry and exit?
- How will you manage risk?
It’s important to choose a regulated broker like Seacrest Markets and familiarize yourself with the platform and any trade costs involved, like spreads and commissions.
Once you’ve settled on a CFD broker and have at least a rough trading plan, you’ll want to test the waters. And there’s no better way to test the waters of CFD trading than by using a demo account.
Demo Account: The Testing Ground for your CFD Trading Account
Unless you have previous trading experience, there’s a lot of value in using a demo account.
Here’s 4 reasons you want to seriously consider trading a demo account first.
Familiarize yourself with CFD trading platforms
Even if you’re an experienced CFD trader, you may want to use a demo account for a while to familiarize yourself with the CFD platform. It’s a bit like driving a car, it may come quickly, and even feel natural, but you don’t want to go from 0-100 right away.
Test your strategy
Building a trading strategy on paper is great, but you need to put it to the test. The only way to take it from theory to reality is to actually test it. What works “on paper” may or may not work in the real world. A demo account is the perfect time to test your strategy.
Fine tune your plan
Once you’ve tested your trading plan, you’ll be able to pinpoint what does and does not work. This is when you need to fine-tune your plan. Double down on what works and discard what doesn’t. No trading plan will be perfect from the get-go, which is why it needs to be stress-tested and tweaked.
Build confidence
After you’ve traded a demo account, tested your strategy and fine-tuned it as needed, you should have built some confidence. If you don’t feel confident yet, consider demo trading for a little longer to continue building confidence. Remember: the goal is confidence, not perfection.
Risk Management Strategies for CFD Trading
Risk management should be non-negotiable in CFD trading if you want longevity. There’s a few key risk management principles you should incorporate into your trading.
Here are 3 of the most important ones.
Position sizing
Position sizing is how much of your total account you are risking on each trade, and it should align with your risk tolerance. A good rule of thumb is to never risk more than 1-2% on each trade. In other words, you should never stand to lose more than 1-2% of your total capital if you get stopped out of a trade. This way, you can have several losses, but still “stay in the game”.
Stop loss
Speaking of getting stopped out, this will only happen if you actually have a stop loss in place. Not sure what a stop loss is? It’s you telling the market, “Close my trade when I’ve lost ‘this much money’”. You basically lock in a manageable loss before it becomes an unmanageable loss and wipes your account out.
Leverage
Leverage is a double-edged sword; great for increasing profit, but it also increases your losses. Firstly, understand how leverage impacts your trades. And secondly, consider starting with less leverage and slowly working your way up to more leverage over time.
Day Trading vs Longer-Term Trading
When it comes to CFD trading, there are two main categories of trading, but several more within those two main categories. The two main categories are day trading and longer-term trading.
Day trading can be split into normal day traders and scalpers. Although neither trading style keeps trades open overnight, day traders may leave their positions open for several hours. However, scalpers are usually in and out of the market very quickly – sometimes even less than 1 minute.
Longer-term trading is slightly different. Swing or position traders will keep their positions open for several days, weeks or months at a time. This type of trading is usually more based on fundamental analysis, rather than charts only.
Neither trading style is better than the other, and it’s up to each individual trader which style is right. Bear in mind that day trading and scalping are much more time sensitive, and probably aren’t suited if you already have a demanding job.
CFD Trading Strategies vs Normal Trading
You may be wondering: what’s the difference between CFD trading and normal trading?
In theory, the goal is the same: make money trading assets. The key difference is that with CFD trading, you never take ownership of the assets – CFDs are derivatives and get their value from the underlying asset. So, in traditional trading, you actually buy the asset itself (Apple Stock/Bitcoin, etc). But with CFD trading, you never take ownership of the underlying asset. Also, if you do traditional trading, you may or may not use leverage. But CFDs are almost always traded using leverage.
There’s another “category” of market participants, which are investors. Their goal may be entirely different from that of a trader. Investors may buy an asset and never sell it, and instead opt to receive income in the form of dividends. So, it’s an entirely different mentality and goal for trading. Investors buy and hold assets directly, rather than trading
Can You Make a Living from CFD Trading?
Now to the question you may be wondering: Is it possible to make a living from CFD trading?
Technically, Yes. In theory, it may not be that easy.
The good news is that there are some things you can do to better your odds of success. If you want to take CFD trading seriously, treat it like a business. This is the first step to a profitable CFD trading career.
This means taking the time to plan appropriately, monitor your trades, adjust as needed and find your own style. But you also need to be realistic and ask yourself how much capital you have to trade with? If you need $80,000 a year to live comfortably, and are targeting a 2% monthly return, you’ll have to be trading over $300,000 to generate these returns. The best idea is always to start small, scale up, and eventually go full-time.
CFD Trading Journey: Opportunity and Risk
CFD trading is an exciting world. You get access to trade several asset classes, the power of leverage, the ability to profit from rising and falling markets, and flexibility in how you want to trade. But these pros don’t come without a few risks you should be aware of.
Firstly, the same leverage that amplifies returns can work against you when the trade doesn’t go your way. Secondly, the flexibility to trade almost whenever you want can lead to overtrading if you’re not disciplined.
The best way to start CFD trading is to go slow and steady. Start with a demo account, build your strategy and tweak it as needed. If you try to make millions off the bat, you’re probably not going to succeed. Treat it like a business and your odds drastically improve.
Starting Trading CFDs as a Beginner
No two CFD traders journeys looks the same. But there are a few common threads in successful traders. Have a plan, track your wins and losses, and always prioritize risk management.
Last but not least, continually educate yourself. Just as you would skill yourself up to get an increase in the business world, apply the same mindset to trading. If you do this, you’re already ahead of many people. Stay consistent and practice, and you may just find your groove and build a sustainable stream of income through CFD trading.
