Numerous trading opportunities continue to emerge across the financial markets as the COVID-19 pandemic triggers unprecedented fiscal and monetary interventions all around the world. The financial industry benefits from most of the new liquidity created and thus asset price volatility increases, creating an environment where the wider public can get involved and take advantage.
Contracts for differences (CFDs) are an option available for the retail trading industry and due to multiple features, represent an optimal solution to tackle the current conditions in the markets.
What are CFDs?
CFDs are financial derivatives tracking the exact price of the underlying instruments, generally used for taking advantage of price movements in the short run. With CFDs, traders have access to the financial markets using leverage, competitive spreads, and plenty of other trading tools, depending on the brokerage house they use.
Just like an mt4 download, understanding CFDs is not difficult, given the abundance of information now available in the online world for free. Even though using CFDs is one of the approaches embraced in masses by retail traders for the past year, it is critical to highlight when these instruments are suitable.
When are CFDs suitable?
Due to big fiscal spending and accommodative monetary policies, financial markets took a turn after the March 2020 lows and since then, the conditions have been risk-positive. When prices have directional bias and volatility is moderately high, an environment in which using CFDs becomes appropriate is created.
Ranging markets can also be suited, especially for traders who are risk-averse or conservative, wanting to get involved in stable markets. Still, breakout trading continues to be a high-accuracy approach, and given most of the professionals rely on it, retail traders can follow on the same path.
Important aspects to consider
Although CFD trading comes with multiple benefits, as already mentioned, retail traders also need to consider the risks involved. Margin trading can increase both the potential for profit and loss, which is why all traders should follow strict risk management principles. Professional trading is a long-term endeavor and get-rich-quick advocates generally don’t end up doing too well.
Trading costs need to be taken into consideration, as well, and thankfully, CFD trading comes with competitive costs, especially for financial assets that are liquid and heavily traded by retail and institutional players.
Traders should be aware that CFD trading is not a fixed income stream and that aside from acquiring a vast amount of information about how the markets function, they might need to also develop skills enabling consistent accurate trade.
With proper education and in the right conditions, CFDs are financial derivatives which can help retail traders achieve financial independence. However, traders need to be aware of the risks involved and to use all the tools at their disposal to deal with unexpected price action developments, just like professionals do. As long as financial assets continue to be volatile, using CFDs will continue to be popular among the retail public.