CFD trading is becoming an increasingly popular way for investors to make money in the UAE and across Europe. Although relatively new, CFD trading has been particularly successful due to its flexibility and low overheads (e.g. it isn’t subject to stamp duty). CFD stands for ‘Contracts for Difference’. These financial instruments allow traders to buy or sell an asset without actually owning it.
The beauty of this market is that by using margin (borrowing the money), you can increase your exposure with just a small initial deposit. There’s the potential to earn large profits very quickly – but equally, losses can be just as swift.
For this reason, before entering into the world of short term trading with CFD brokers in Dubai, it’s imperative to understand the factors that affect a CFD’s price. If you don’t, you could quickly find yourself in a position where your losses start mounting up, and so-called ‘stop-loss orders’ will have little or no impact on limiting your exposure.
To avoid this scenario, investors should always use short term strategies to manage their funds with CFDs.
Understand how CFDs work
To successfully execute a long or short term strategy, you need to consider three key elements: market direction, volatility and trend. Understanding how each factor affects a financial instrument is crucial in determining whether a CFD will rise or fall in value.
Market direction refers to whether a financial instrument is likely to gain or lose price. To rephrase it, will it go up or down? Traders can exploit this characteristic by buying CFDs when they expect the market to increase and selling when it’s expected to decrease. This strategy is typically known as ‘going long.’
Additionally, volatility refers to the degree of fluctuation that a given asset experiences over a while – e.g. does its price move wildly up and down, remain relatively stable, or somewhere in between? For example, take Bitcoin: an incredibly volatile financial instrument that often sees its value swing from high prices to shallow ones in a matter of hours. It makes it a perfect candidate for short term trading strategies.
Trend, meanwhile, refers to the longer-term price direction of an asset. Whether prices are rising or falling is perhaps the most prominent factor in determining which strategy you should adopt; traders who think that the market will fall want to sell CFDs, while those who believe it will rise should go long instead.
Optimise your trading style
Once you’ve determined whether you should ‘go long’ or ‘go short’, how can you increase your chances of success? Investment experts recommend using the following steps:
Determine correct money management
Implementing a fixed risk and fixed reward approach is crucial in ensuring that traders only lose 10% of their total funds at the most. Once this level is breached, investors should not continue trading.
Decide on your investment timeframe
The shorter the time you have to make a trade, the more likely you will come across volatile markets that can cause your CFD to lose value. Longer-term strategies are generally preferred as they provide more stability and opportunity.
Choose an appropriate short term strategy
For instance, using stop-loss orders prevents losses from spiralling out of control if prices fall too low. Additionally, knowing when best to close all positions at the end of each day can be invaluable in limiting exposure beyond 10%.
Trading isn’t easy. Even experienced investors will find their funds taking a beating at some point or another. However, with the right strategies in place – and the will to stick to them no matter what happens – there’s no reason why you can’t become an expert in short term CFD trading.
Decide what to do next
One of the many advantages of trading CFDs is that you aren’t tied down to one trading account. If your first broker doesn’t provide enough tools – including advanced charting, experienced traders or multiple trading platforms – there are plenty of other options out there. Just ensure you pick one that suits your requirements.