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Even if you already know the basics of CFDs (contracts for difference), are you aware that many use the instruments to play both the long-term and short-term time horizons of markets? For some reason, the short-term strategists, like scalpers and swing traders, get all the attention in the media. But an effort to make better financial choices, CFD enthusiasts often use the unique, versatile contracts for long-term investing and trading purposes. It’s imperative to first review the basics of ownership, price direction, and cost before delving into the ways in which newcomers and seasoned investors take long positions after doing their research on particular assets.
If you know what CFD trading is, then you likely understand the immense potential of playing the markets without having to own underlying assets. The whole point of a contract for difference is that it is not an ownership document, like a share of stock or a receipt for the purchase of precious metals. Another benefit is that CFD traders can go long or short on any market they choose to enter.
That means price direction doesn’t matter. What does matter is that the trader has a good idea of how to predict which direction values will move and place their capital on contracts that stand to earn a profit. For instance, if you do research on ABC Corp. and come to the conclusion that the share price is about to fall after quarterly earnings are reported, then you could use a CFD to stake out a position on the short side.
For many newer investors who have small account balances, contracts for difference offer the chance to take part in virtually any asset or asset class there is. Because you’re not purchasing the underlying asset, it’s easier to make a small purchase and still get in on the action. If XYZ Corp. shares are prohibitively expensive, you can still use a CFD for a fraction of the cost to speculate on the movement and take a position.
Consider using a CFD for scalping, day trading, swing positions, and other short-term horizons if you prefer to operate in volatile markets. The goal here is not to wait for lengthy trends to play out but to observe and predict shorter moves and capitalize on them. The method is to identify price direction and enter transactions when you feel you’ve spotted a worthwhile trend. Most practitioners of this technique set tight stop-losses and take-profit points that are about two or three times as large as the stop range.
If you enjoy using fundamental analysis about how well a company or asset class will do in a time horizon greater than a year, then long-term positions are more suited to your personal style of operating. Be sure to check the asset’s performance at least once per day, and consider using much wider stops that short-term traders use. Where should stops be set? Explore the upper and lower price limits for the past year or two and use that data to make a decision about where you’d prefer to exit the trade if it goes against you.
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