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3 Important Things About CFD Trading: Risks, Strategies and Orders

May 31, 2012 | Comments: 0 | Views: 123

If you are going to ask me, there are at least three (3) very important things that all traders, both beginners and veterans, need to focus on when it comes to contract for different (CFD) trading. These are specifically about its risks, the available and common strategies as well as the orders. I will explain these three (3) in the sections hereunder for you to appreciate the reason why I think they are very essential and important.

CFD Risks: Market, Liquidation and Counterparty

On the one hand, while it is very basic to understand first the mechanics of how trading contracts for different really works, I also believe that one of the primary aspects that you should be aware of is related to the risks involved when you are trading this kind of product.

In this regard, there are actually three (3) kinds of risks associated with CFD. These are the market risks, liquidation risk as well as the counterparty risks. The market risk refers to the natural characteristic of the underlying assets, which is commonly volatile. In the midst of such situation, a trader is allowed to enter position more accessibly because the margin is smaller than any other products out there. In that regard, traders make hasten decisions and, most of the times, end up in overtrading. It would be good if the result from overtrading is positive, but the most common case is the other way around. Hence, traders must know their limits, which will be discussed below. Liquation risk is about the variation margins, which comes in short notices. If you did not deposit the requited amount prescribed by the broker, then your position can be closed or liquidated instantly. Thirdly, the counterparty risk is another risk dimension that commonly appears in over the counter transactions for traded derivatives.

Applicable CFD Strategies for your Position

On the other hand, there are various strategies that can be explored when it comes to CFD trading. The strategy that you will choose will primarily determine the level of your possible earnings or losses. But, you are executing strategies in order to win and not to loss. Among the most common strategies that I know are following the trend and scalping. The orders below can also be considered as part of your strategies.

Stop and Limit Orders

Thirdly, but not the least, stop and limit orders are very essential in CFD trading. This is because these are your signal whether you should stop or give up. For example, a limit order can be executed if you think you have already gained enough in order to protect your profits as well just in case that the market reverses. On the other hand, you can also execute a stop loss order when it is the time to stop hoping that the market will move favorably on your side. is an online trading portal and education site, aimed at making it easier for traders to learn about CFD covering a broad base of different investment types, instruments and risks.

Source: EzineArticles
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