Brokers advertised extremely high potential returns. Tempting when savings deposits hardly yield any interest. But many traders will have ignored one thing: CFDs are associated with high risks. The profits come from leverage, which does not only work in one direction. Losses are also increased disproportionately. Simply losing without know-how and experience - not a very good idea. Our guide explains exactly why the CFD demo account comes into play here. Important tips and facts are now easy to read.
CFD Trading: High Risk for Beginners
CFD stands for contract for difference - which means contract for difference. Investors do not buy securities such as shares or commodities with a concrete value behind them. CFDs are derivatives, i.e. financial products derived from other assets. The underlying asset can come from different asset classes, such as:
Since 2017, cryptocurrencies in particular have come to the fore among assets - first and foremost bitcoin. But contracts are now also traded on Ripple, Litecoin or Ethereum.
What makes CFDs so interesting? Direct investments normally only realise profits if there is a positive difference between the entry price and the exit point - in other words, the price has climbed. Shares additionally achieve their yield through dividend payments. CFDs rely on a different mechanism.
Traders realise profits from a position through both short and long positions. This means that returns can be achieved in bull and bear markets. If prices go down - for example, because a political decision threatens to have a negative impact on the markets - traders take a short position. A prominent example is the tug-of-war over a Brexit agreement. The more the parliament becomes entangled in a debate about the interpretative sovereignty of the referendum, the more the British pound comes under pressure against the euro.
Positive signals can be derived from economic data such as trade agreements or a reduction in tariffs. Here, the chance is high that currencies will appreciate or that indices will go up. A long position skims off profits in such a market environment.
The problem: If the forecast does not work out - and the tariff dispute is intensified instead of eased - the dollar or the euro will go down. Since CFDs are traded with leverage in personal area Exness, the loss is multiplied in the end. Highly volatile markets are particularly susceptible to sudden movements - traders sometimes incur very high losses. A CFD demo account does not eliminate these risks. It does, however, sharpen the investor's eye for recognising trend reversal signals in the chart at an early stage.
CFD Trading Demo Account: Learning to Trade with Leverage
The real challenge in trading with contracts for difference is not the market fluctuations. Much more important is the fact that many private investors underestimate the effect of leverage. What does the leverage of, for example, 10:1 actually mean?
Quite simply, leverage reflects the ratio of trading capital to position size. In direct trading, the investor buys shares for 10 euros per share. With an order volume of 100 shares, 1,000 euros must be invested. In CFD trading, only part of the capital for the order comes from the trader. With a leverage of 10:1, only 100 euros must come from the investor for a position size of 1,000 euros.
With the leverage, investors in CFD trading realise their profit - or make a high loss. Especially with the first trades, the learning curve is often very steep. Small mistakes have serious consequences. What can happen?