What are CFD
CFD (Contracts For Difference) are financial derivative contracts, whose value exactly follows the price movement of real underlying assets such as stocks or commodities or currencies. CFDs offer some unique hidden benefits, which most people still to this day don’t know about. These benefits are superior liquidity and price linearity. As a result of these benefits, CFD trading is better than any other form of trading, such spot market, classic share trading, Futures or Options trading. CFD trading wins out in each and every case, for all directional trading strategies. The benefits of CFDs can be summarized in 3 key words:
- Unrestricted access
Liquidity means you can get the best price for buying or selling a market. Linearity means that your CFD trade will follow the real market very closely, to the penny, and very smoothly. And unrestricted access means that you can sell US stocks, even when investors who trade actual shares cannot short these stocks, because of temporary short sale restrictions imposed by financial regulators in the US. This only happens for few weeks during extreme bear market conditions, but it does happen in every major bear market. And when it does happen, only CFD traders have affordable, linear and liquid access to selling US stocks.
What I Need to know to Start CFD Trading
CFD trading requires opening an account with a good and regulated CFD broker. As a beginner you may not feel comfortable with some types of advanced trading platforms, but most brokers offer various platforms, of different level of complexity. The most popular platform is the MetaTrader4, and sooner or later you can move onto this platform should you need to. But other types of platforms also have different advantages. MetaTrader4 is a downloadable program, which you need to install on your computer, and you can only have access from that specific device. Whereas web based platforms are accessible from any device, just by going to the broker’s website and logging in. If you use multiple devices and want to also trade when on the move, the MetaTrader4 is not a good choice. There’s an exception to this, the CFD broker AvaTrade actually offers a MetaTrader4 platform which is web based, but with most other brokers you will have to decide for one or the other.
Be sure to focus your trading strategy around one or two markets, such as a commodity and one currency, such as crude oil and USDCAD. This will help you gain more insight into the markets, and avoid false signals. These two markets for example are almost exactly inversely correlated. Do not attempt to trade a market just because it has low margin requirements or low spreads. In my opinion, only solid trends should be traded, and markets such as USDCAD and crude oil, traded through CFD, provide you with all you need. You can expand your trading options later, but why not stick to one market first, until you become profitable.
Successful trading is all about:
- Having an advantage over the market
- Being a specialist
- Ignoring all financial news
It will take you years to find a big advantage over the market, something that others don’t know. But it’s possible, due to the nature of the complexity of the markets. There are millions of traders, but there are billions and trillions of trading methods. Definitely there’s more and more to be explored. Being a specialist is about trading one or two markets, or at least having most of your focus on these. And ignoring the news is important, because news is confusing, and it cannot possibly be used to figure out market direction. News however can be used as a volatility indicator.
You will hear many stories and tips from profitable traders, however even these stories are not useful to you. Even the best traders do give wrong tips, because they have been fooled themselves into thinking that this or that indicator helped them predict the markets correctly. When in reality those indicators simply, by random chance happened to align with some bigger truth. So be careful when doing back testing and when you evaluate indicators. Experience has shown that faulty indicators are tricky, and it’s hard to tell that they are indeed faulty.
Also, the concepts of support and resistance are by far the biggest illusion in the markets. The definitions are poor and ambiguous, amounting to no definition being made at all. it simply tells you that if market price goes above a certain level, then it will go higher still. This makes the technical analyst who wrote that article look right, no matter what the market will do, the article will seem valid to you. So be careful especially of support and resistance levels, because markets do not really care about such levels.
How Set Up a CFD Trading Account
In my opinion is best to choose a broker which requires a small deposit, so that you can feel comfortable and not be worried about taking too much risk. All you have to do is fill in the registration form, provide the required copies of personal documents and a payment method for depositing and withdrawing funds. You can choose the level of leverage for the account, which can be from zero to 400:1. In reality there’s no need to use more than 100:1 leverage. And in the case of trading cryptocurrencies you may want to use lower leverage, or not leverage at all, because these markets are more volatile.
As far as the strategy is concerned, you do need a good strategy to at least avoid confusion and false trading signals. Most popular indicators do not really work, neither does day trading and fast trading. You need to focus on a slow trading strategy first, ignore all financial news, and trade using simple methods, such as the 10 day moving average and few indicators such as the Parabolic SAR. You can also use chart patterns and trend lines.
In my opinion, the best indicators for beginners are:
- 10 day moving average
- Parabolic SAR
- LSS pivot numbers
These can work very well for day to day trading, there’s no need to rely on Fibonacci number and overrated indicators, because most of these do not really work. You can later make your own programs in Excel or in MetaTrader4, to modify these 3 indicators.
Types of CFD Trading Accounts
Different brokers offer different types of levels of accounts, such as basic, silver gold, platinum and VIP. And the higher the level, the more money you will have to deposit to open an account of such level. It could be as much as $50,000. But each level offers different benefits, typically the higher the level the more support you will get, in the form of free trading signals, education, trading tools, and possibly even a personal mentor. In my experience, personal mentors are good, but they are not super clever, sooner or later an amateur trader can become better than these mentors. So don’t expect that a mentor can make you millions just like that. However the higher level accounts do offer good education which is worth many $1000s, and is only found elsewhere in premium seminars.
Best CFD Trading Platforms for Beginners
There are many good platforms for beginners, but eToro is definitely the number one choice for all beginners. This broker is very affordable to open an account with. It offers very good tools, it offers top class social trading where you can copy profitable traders’ signals, and a lot more. eToro does not offer MetaTrader4, which many traders need at some point, but this is because MetaTrader4 is not the best choice for beginners. MetaTrader4 simply allows you to program you own indicators and expert advisors. These are usually simply to slightly complex programs that help you with your trading strategy. However, there’s nothing stopping you from using both eToro and one more broker later which offers MetaTrader4, both approaches are useful.
This is a regulated CFD broker offering both binary options and CFDs. It does offer some free trading signals and a very easy to use platform.
This is a very good broker, offering top class spot forex and CFD full range of markets. It also offers swap-free trading account for anyone willing to do swap-free trading.
This broker offers massive range of markets for CFD trading, plus some extra trading tools to help beginners and medium level traders.
This is a more advanced CFD broker, it offers advanced social trading, very similar to eToro’s but for more advanced traders. It offers mini lots, and many cryptocurrencies as well.
This CFD broker offers wide range of cryptocurrencies, it’s heavily regulated and it also offers many other markets. Additionally, it offers guaranteed stops, which avoid slippage.