A contract for Difference or CFD is a relatively new instrument that allows traders with low capital to trade expensive assets like stocks, commodities, precious metals etc. with leverage. Using CFDs traders can diversify their portfolio and invest in a larger variety of assets. However, trading CFDs has positive and negative aspects as well, which is why we’ve come up with this article. What we’ll do is to put CFD trading and forex trading head to head, in order to see what are the things you need to know about this markets.
Are CFDs different from Forex?
The first need to understand about CFDs, especially those that are based on stocks, is the high level of volatility. You need to understand how to trade in a volatile market, before deciding to jump in and invest in CFDs. So the first weaker aspect of CFDs is related to that. Traders that are unable to take decisions in environments that change at a high pace should stick to forex trading.
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You need to adjust your risk management system according to this aspect. Trading in volatile markets could be tricky, especially if you are at the beginning and you have little or no experience in this field.
Some people say that the Forex market is the riskiest market in the world. Well, let me ask you this?
How can a market that fluctuates 1% a day be so risky?
Obviously, there had been times when volatility spiked in the forex market as well, but those situations take place very rare.
CFDs carry a high level of risk because the underlying assets are more volatile. Imagine that a stock can drop 10% in a day easily. If you are also using leverage, that move can wipe you out from the market.
If we take into account this aspect, CFDs are far riskier than forex. That does not mean you should run from them. Simply because the risk is higher does not make an asset less attractive.
What you need to do is to adjust your trading strategy and risk management model, so you will have the necessary tools which will help you generate profits in this kind of environment. Education is the most important, so make sure you study the assets you want to trade, before actually doing it.