Why Trade CFD’s – GoldenGates

CFDs are regulated investment products that offer investors a wide range of benefits. Here are why CFDs are tailor-made for the modern investor seeking an easy and potentially highly profitable investment product:

Leverage
Trading with leverage opens up a whole new world of possibilities for investors. It effectively means that traders are only required to place a margin so as to control an entire trade position. For instance, a leverage level of 1:100 will mean that a trader only needs to place a margin capital of $1,000 to control a $100,000 trade position! While leverage boosts potential profits, investors should be aware of its dangers as well, as it can magnify potential losses as well.

Going long or short
CFDs are an agreement between an investor and the broker for the difference in contract value between the start and end of the contract period. This means that no matter the direction of the market, investors have opportunities for making profits by going long or going short.

Multiple Assets
CFDs are available for practically every financial asset in the world. At GoldenGates, you can trade hundreds of CFDs of a wide range of assets such as Currency Pairs, Stocks, Indices and Commodities.

Low Trading Costs
CFDs provide exposure to financial assets without the obligation to buy or own them. The idea of a CFD contract is for two parties to exchange the difference between the purchase price and the sale price of the contract. It is essentially a contract on the price movement of the underlying asset. This effectively reduces transaction costs. On most CFD trading platforms, the only costs are spreads (the difference between the bid and ask prices) – there are no extra commissions or associated fees to open or liquidate your transactions. In any investing activity, lower costs can only enhance your profitability.

Round the Clock Trading
CFDs are not traded in centralized locations or exchanges. This means that they are not subject to defined trading hours. CFD investors can open, close or manage trades of their favourite assets even ‘out of hours’.

CFD Trading Risks

CFDs are exciting investment products, but they are not without their risks. Here are some of the risks of trading CFDs:

Leverage Risk
As mentioned, leverage is a double-edged sword. Leverage has the power to magnify losses when you make a wrong prediction, even when a price makes a nominal movement. It is important to be aware of these risks so as to select an optimal leverage level that will give you the best chance for success while allowing you to control the risk.

Market Risk
Financial assets are prone to price shocks and surges. With CFDs being leveraged products, big and sudden price movements can deliver devastating losses to investors.

Liquidation Risks
In some CFD platforms, investors may be required to add funds to their trading accounts to boost their margin requirements when the price moves far against their prediction.

Managing Risks when Trading CFDs

Successful CFD trading is all about managing risks. Here are some tips for limiting risk exposure while enhancing your profitability when trading CFDs:

Risk Management Tools
The GoldenGates CFD platform offers risk management tools such as Stop Loss and Take Profit orders that automatically close orders to manage your risks. Stop-loss orders cut your losses at a specified price point when the market goes against your prediction. Take profit orders enable you to book and lock in your profits at a specified price point when the market goes according to your prediction. These risk management tools help traders to shield themselves against the inherent market risks of trading CFDs.

Leverage Level
The danger of high leverage is clear. But, leverage is also why many investors trade CFDs. It is therefore important to choose a leverage level that is ideal for your investment needs. Most GoldenGates traders are advised to use a leverage of around 1:30 but be sure to have an honest discussion with your personal account manager so you can work out the optimal leverage level for your investing goals.

Order Size
When trading using a standard lot size, one pip price movement is usually worth $10. For instance, if the price makes a 100-pip movement in your favour when you are trading standard lots, you will earn $1,000 (100*$10); the loss would be $1,000 if the price moves against you. It is important to always trade an order size that will not put at risk more than 5% of your capital on any one trade. As well, you can vary your order size depending on the type of asset traded or trading times. Volatile assets should be traded with small order sizes, while less volatile assets can be traded with bigger order sizes. During volatile trading times such as the New York trading session, investors should trade with smaller order sizes; while bigger order sizes can be traded during slow-moving trading hours such as during the Asian session.

Effective trading, especially with CFDs is all about profit enhancement and risk management. There are no investments that offer zero risks, but as explained above the rewards often outweigh the risks. It is vital to learn and implement risk and money management strategies when trading CFDs. To learn more about this, be sure to visit our education centre.