Trading CryptoCurrencies with CFDs
With the boom of popularity and profit for cryptocurrencies, a lot of institutional brokers offer trading services for people who are interested to be traders and investors about cryptocurrencies. Due to the fact that the cryptocurrency market is decentralized and deregulated, a lot of those who are more conservative in their investment and trading philosophies have second thoughts about diving into this new economy.
To help dispel the fears and anxieties of those traders and investors, some brokers allow the trading of cryptocurrencies through the use of CFDs, or Contracts for Difference.
Before you can embark on our quest of trading cryptocurrencies with CFDs, you have to make sure that you are set up with a propert regulated broker that has a range of different cryptocurrency pairs. That is where Plus500 comes in.
You can read more about their offering in this Plus500 crypto review. They have up to 14 different cryptocurrency pairs with which you can trade as well as a range of traditional asset classes.
CFDs: Getting something out of nothing, partially
The first question that you should ask is this: What is a CFD in the first place? CFDs are actually financial instruments that derive their value from an underlying investment. These are contracts that allow people to put money in an investment that neither the broker or the trailer owns.
In this way, a cryptocurrency CFD is a lot like a future instrument. However, unlike a Bitcoin future the settlement occurs every day and is not closed out at the expiry of the trade. They are also slightly more risk than a Bitcoin future as they have more leverage on them.
This means that whenever you complete or close a trading order, you will get the difference in price. For those who have experienced trading in currencies from a forex broker, one trade is primarily a CFD unless you physically want the currency that you bought.
How do you profit from a CFD?
With Contracts for Difference, you can trade both up and down, which gives you twice the opportunity to profit in comparison with just holding stocks or debt instruments like bonds. Also, CFDs are leveraged, which means that you can control more units with lesser money. It is common to find leverage ratio of 1:5 which means that you can trade 1 bitcoin for just 20% of the price or have 5 bitcoins for the price of one.
You can do a long or a short trade. A long trade means that you are bullish on the cryptocurrency or that you think that the price will go up. A short trade means that you are bearish or that you think that prices will go down.
So, if you enter a buy trade with Litecoin at $100 and closed the trade at $150, you earn profit which can even magnify depending on your leverage. So, if your account has enough money and assuming you are using 1:5 leverage, you would have earned an additional $250 with one trade. Consequently, if you did a short trade with the same prices, your account would have lost $250.
Tips and tricks
For CFDs, the most important piece of information is the price. For example, some new coins just simply grow exponentially without rhyme or reason simply because their initials are often confused with another cryptocurrency or that there is a news report about it.
No one can accurately predict the price of a cryptocurrency due to the market, but there are a few things that you can do to help you.
Use technical analysis.
Technical analysis is a method where you predict the price of a financial instrument by analyzing the movement of the price. Past performance does not guarantee future results, but a lot of traders have earned fortunes with it. For those who want a good explanation, you can use the free school, which applies to both forex and cryptocurrencies.
Trade one High-Volume Cryptocurrency at first
Some cryptocurrencies are more volatile than others. The great thing about trading a cryptocurrency with a high volume is that you can learn faster and that you can move your trades quicker. Try to master one cryptocurrency at first and move on if you have earned double your capital.
Use stop losses
A stop loss is an automatic trigger that automatically closes your losing trade after it hits a price. A stop loss will prevent you from losing more money and use the money you currently have to get into a better trade.
Knowing what CFDs are can help you increase your profitability and at the same time improve your discipline. Just make sure to consume as much positive and valuable content as you can. The cryptocurrency is always changing, and adapting to those changes will make you a better trader and investor.