The Beginner's Guide to CFD Trading in Malaysia
Categories: CFD Trading
Publish date: 2022-11-30
If you're new to CFD trading, or just want to brush up on your knowledge, this guide is for you. We'll cover the basics of CFD trading, what it is and how it works, and introduce you to the advantages and disadvantages of CFD Trading and why you should trade with FXCM. Additionally, some crucial advice and tactics will be provided to support you in your trading endeavours.
Table of contents
- What is CFD trading?
- How does CFD trading work?
- Long Buy and Short Sell in CFD Trading
- What are CFD brokers?
- Advantage of CFD trading
- Higher Leverage
- Easy Accessibility
- More Flexible
- Disadvantages of a CFD
- Margin Trading
- Weak regulation
- How to Trade CFD in FXCM?
- Why trade with FXCM?
- CFD Trading Strategies
- Day Trading
- Swing Trading
- CFD Trading Tips
- Start Small
- Use Stop Losses
- Demo Accounts
- Frequently Asked Questions (FAQ)
What is CFD trading?
CFD trading or known as contract for difference trading is a contract between you and the brokers to exchange the difference in the price of the asset between the opening and closing time. Thus, you may gain profit or losses from when the contract opens to when it is closed depending on whether you speculate the asset price to be rising or falling before buying the CFD contract.
One key note to take is CFD trading allows you to make money by speculating on the rising or falling price of assets in financial markets without buying and selling of any underlying assets, such as forex, indices, commodities, shares and treasuries. To put it simply, you do not own any actual asset when dealing with CFD trading.
How does CFD trading work?
CFD trading takes place in fast-moving global financial markets such as shares, forex, commodities and indices etc. As you can see, it is not limited to Malaysia, a particular region or country.
CFD trading works in a similar way as forex trading. The difference is, instead of buying and selling the underlying assets, you buy and sell CFD contracts. A CFD contract is an agreement between you and the broker which allows you to trade them on margin. This means that you will only have to put down a fraction of the asset price to open a contract while the rest can be leveraged by brokers.
Let's take a look at an example to understand this better. Assuming the cost of a share in Microsoft is $100, and your brokers offer up to 5% margin. This means you can buy a share in Microsoft for $5, and the brokers will lend you the rest of $95. Then, if the share price rises to $110, you sell your CFD contract and return the amount of money lent from brokers ($95) and then minus the initial cost you buy the contract ($5) before finally making a profit of $10 which is double the initial investment assuming no extra fees required.
Compared to trading shares directly, you can do CFD trading with only 5% to 20% of the share price, depending on the margin offered by brokers. The benefits of doing CFD trading are that you do not need to be a full-time trader to make money from it. It is a more flexible trading method as you do not need to buy and sell the actual asset.
Long Buy and Short Sell in CFD Trading
When doing CFD trading, you will often hear terms such as long buy and short sell. These are the main 2 types of order when it comes to CFD trading. Here's an explanation of long buy and short sell in CFD trading.
Long buy means you are buying CFDs at a lower price at opening position and selling it at closing position. It is typically used when you believe the price of the asset will rise in value. Let's take a look at an example, assuming if you are long buying Microsoft shares with a contract worth $100 at opening position, you will buy the contract for $100 and sell it for $110 at closing position. Therefore, you made $10 per share in profit. This is similar to buying the share from the market, except you don't actually own the underlying assets.
On the other hand, short selling is a little more complicated. As opposed to long buy, you are borrowing an asset from a broker to sell it off and then return the asset when you buy it at a lower price in the future. Simply put, when you close your position, you return the asset to the broker and keep the difference in cost. This is used when you believe the price of an asset will drop in value down in the line. As an example, if you are short selling Microsoft shares with a contract worth $100 at opening position, you will sell the contract for $100 and buy it for $90 at closing position. Therefore, you made $10 per share in profit.
What are CFD brokers?
CFD brokers are the middlemen who provide CFD trading services for you. They provide you with the platform to trade CFD contracts via the internet, and charge you a small fee when you buy and sell CFD contracts.
For example, if you want to open a CFD contract on Microsoft, the broker might charge $1 for every $100 traded. There are many CFD brokers in the market. Some of them are full-service brokers where they deal with all of your investments, while others are dealing-only brokers with no investment products. Full-service brokers may offer you more product choices, while dealing-only brokers may have lower trading fees. You may also choose brokers based on the region that they operate in.
In summary, CFD trading is an exciting and flexible way to trade the financial markets. It is not just a way to make money, but you can use it as a learning tool to understand how the markets work.
If you are new to trading, It is highly recommended to learn the basics of CFD trading first before jumping in. You may want to start by learning about the different types of CFDs, and the risks involved with CFD trading.
Advantage of CFD trading
CFDs are traded on margin meaning the broker allows users to borrow money to increase leverage or the size of the position to amply gain. This means you can possibly earn higher profit in a shorter period of time. CFD trading typically provides higher leverage than traditional trading. You can get margin as little as 3% depending on the assets.
Most CFD brokers offer products and services in the global worldwide markets, allowing 24 hours around-the-clock access. Investors can trade CFDs on a wide range of worldwide markets anywhere and anytime.
CFD trading offers greater flexibility than traditional trading such as access to foreign markets, leveraged trading and short selling. Some markets prohibit short selling or demand higher margin as opposed to long buy, however CFD trading is allowed short selling because you don't actually own the assets.
CFD Brokers offer a lot of choices such as stocks, commodities, indices, currencies, and even cryptocurrencies. This allows investors to have a wider range of CFD trading vehicles to choose from whatever you are interested in.
Disadvantages of a CFD
CFD trading can be leveraged to amplify gains and profit, but at the same time losses are also magnified so this can be a double edged sword if not used properly.
The CFD industry is not well regulated enough. This means you should do proper research before choosing the right broker to trade from. A right broker means it has a high credibility and strong financial position and possibly even well known in the industry. FXCM is one of the leading brokers in the industry, click here to check our page if you are interested in CFD trading.
How to Trade CFD in FXCM?
So, you have decided to try CFD trading, but you have no idea how to start? No worries, here's 6 simple steps for you to follow so you can start trading right away!
1. Register an account here
2. Deposits funds into your account
3. Choose an asset to trade
4. Choose a platform
5. Choose your position
Choose whether to go long buy position or short sell position before deciding the size of the position you trade. It is essential to do your research so that the number of CFD that you buy is within your control.
6. Place your trade
A very important tip is that you should try trading using a Demo account in FXCM to ensure you’re comfortable with your chosen instrument before you enter the live markets. This can help you to understand better how to trade with the live data provided in the trial.
Why trade with FXCM?
FXCM Markets is a leading provider of online foreign exchange (FX) trading, contract for difference (CFD) trading, spread betting, and related services. Here's a list of why you should do CFD trading with FXCM:
- Wide range of instruments to choose from
- Excellent trading offers
- Licensed and regulated
- Professional tools provided
CFD Trading Strategies
Scalping aims to make small but frequent profits in a day. They typically only hold positions for a few seconds or minutes and exploit even tiny opportunities based on the trading trend
Day trading open and close trades during the day, usually holding positions for only a few hours to remove any risk that might occur if you leave your position overnight.
The CFD swing trading strategy is all about finding markets that are trending in the desired direction. When looking for trending markets, focus on those that are moving in a consistent and predictable manner. This allows investors to capitalise on opportunities by investing in assets that may be worth a significant amount within a short period of time.
Hedging acts as a form of insurance for your investment portfolio. Take a look at an example, if an investor owns Bitcoin shares, and they expect that the value of the shares is going to fall sooner or later. They can open a short position of CFD for Bitcoin, thus when the value of the Bitcoin market drops, even though their value of shares dropped, the losses are offset by the opening of a short position earlier. This is referred to as a hedging technique and is frequently employed in conjunction with other main CFD trading strategies.
CFD Trading Tips
If you're serious about trading, you need to learn from the best. These tips from top traders will help you avoid costly mistakes.
Leveraging your account is a great way to increase your chances of success when trading. The temptation to increase your position sizes when you're winning can be difficult to resist, but there is always a risk of losses. Paul Tudor Jones, who is widely considered one of the greatest traders in history, said "Don't focus on making money, focus on protecting what you have." Starting with a small exposure and gradually increasing your leverage as your capital grows will help protect against large losses.
Use Stop Losses
Don't let your emotions get the best of you when trading CFDs - make sure to set a clear stop outside of market hours so that you can stay disciplined and make the most profitable trades possible. By following this simple strategy, you'll be able to avoid costly losses and stay in the game for as long as possible!
Making the transition from research to live trading can be daunting, but it's important to take things slow. A demo account is a great way to test out your strategy and get used to the CFD markets. Once you're comfortable, upgrade to a live account so you can see real-world results.
Frequently Asked Questions (FAQ)
Is CFD trading same as Forex trading?
The primary distinction between CFD trading and Forex trading is that the former involves several contract types spanning a wide range of markets, including indices, energy, and metals, while the latter offers just currency trading.
Do I need to have a bank account?
No, you don't need to have a bank account. Most of the time, you can use credit card to deposit funds into your trading account.
Is CFD Trading risky?
Compared to other types of investing, CFD trading has a higher level of capital risk because prices may change quickly against you. You might have to make further payments if you lose more than your deposit.
Is CFD Trading legal?
Yes, CFD Trading is legal in most of the countries around the world.
Where do I trade CFD?
There are many online brokers that offer CFD trading. You can try trading with FXCM and open a demo account to start trading right away.