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What are the Best Tips for Online CFD Trading?

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  • Written By: Patrick Lynch
  • Edited By: R. Halprin
  • Last Modified Date: 20 September 2016
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Online contract for difference (CFD) trading is becoming an extremely popular way of speculating in financial markets. This form of trading began in 1990 and has gained international popularity over the last ten years. Online CFD trading tips include knowing that it is possible to earn money from a fall in a market’s value. Traders should avoid also the commodity markets as they are the most expensive and volatile and also be wary of leveraging. The best online CFD trading tip, however, may be to use the stop-loss option to limit a loss in the event of a market disaster.

CFDs were created in 1990 by traders in the United Kingdom as a means of avoiding the stamp tax when investing. Online CFD trading remained exclusive to the UK until 2000 when various other nations such as Australia picked up on it. It is still deemed to be illegal in the U.S. and other countries, however.

Online CFD trading is different from buying shares. When a trader purchases stock in a company, he or she needs the share price to rise in order to make a profit. When CFD trading, it is possible to make a profit when a share loses value. The process of purchasing a stock in the hope it decreases in value is known as "going short." The traditional process of expecting that the shares will rise in value is called "going long."

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Online CFD trading also gives traders the option of dealing with various financial markets. Along with shares, traders can speculate on the performance of the foreign currency exchange market and commodities such as oil. New traders need to realize that oil trading, in particular, is expensive. Traders should not invest in the volatile commodities market unless it is something they can afford.

When it comes to online CFD trading, it is important to know about the process of leveraging. This effectively allows traders to control stock that is worth 100 times more than their initial investment. For example, a trader who invests the equivalent of $1,000 U.S. Dollars (USD) will be allowed to control $100,000 USD worth of stock.

It is vital for traders to realize that leveraging can be catastrophic as well as lucrative. The nature of online CFD trading means that it is possible for traders to lose more than their initial investment. With leveraging, a $5,000 USD investment could easily become a $20,000 USD loss if the market goes against the trader.

To avoid losing large sums of money, traders need to utilize the stop-loss option. When traders purchase their shares or commodities, they have the option to limit the losses. The stop-loss option enables them to decide on a cutoff point. Once the market drops below this level, the trade is instantly ended. This means that the loss is limited regardless of how poorly the market performs.

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