BinaryOptionsNow - Contracts for difference (CFDs) are a popular financial instrument traded through many binary option brokers. CFDs allow you to capitalize on price movements in the markets without having to own the underlying assets, but they are less restrictive than binary options. The flip side of this is that they carry an open ended level of risk and can include big fees if positions are kept open for more than a few days. Depending on your trading style, they can become a very profitable off exchange asset for you to trade.
What are CFDs?
Contract for difference are traded on many platforms that allow digital options trading. They are a contract between a broker and a trader where the broker will pay the difference between the value of the asset at the strike price and its value at the contract is closed. You can take long and short positions, allowing you to profit if prices go up or down. The contracts are not traded on open exchanges, and are usually simply between a trader and a broker.
CFDs are financial derivatives, which means they mirror the performance of an asset or index, but the parties entering into the agreement don’t have to own the asset itself. They are widely traded in the United Kingdom and Europe, but the Securities and Exchange Commission outlaws them in the United States.
Most CFDs are traded on the margin, meaning that you will only have to put up a small percentage of the total money that is required to own the contract. This is the same leverage that forex traders use.
Differences Between Binary Options and CFDs
Even though the two are offered by many binary option brokers, there are many differences between CFD and binary trading. The biggest difference is the level of risk that trading CFDs involves. With digital options trading, you only risk a set amount of money on a contract. Trading CFDs, on the other hand, requires you to use leverage and doesn’t cap your losses or your gains.
Another major difference is that CFDs can be closed at any time and don’t have an expiry time. In binary trading, you are generally allowed only to liquidate your position before the expiry time if you are willing to incur significant fees and penalties.
How to Trade CFDs
CFDs are used by most traders to capitalize on short term fluctuations in price and for day trading. CFDs do contain contract fees and interest charges on the leverage you use. This means that keeping your positions open longer than a short period of time can quickly rack up fees and greatly eat into any profits that you may ultimately see.
Because of the short-term nature of the investments, many of the strategies that are used for other financial instruments with a binary option broker, including forex and digital options, can be used. Technical analysis and charting is always very important for this type of short term trading. Volatility trading and trading around news events can also be profitable, but carries a greater amount of risk with it. The wild swings in the market coupled with high leverage could easily stop you out of a position on a margin call if you don’t trade carefully.
If you live outside the United States, CFDs are a great financial asset to trade with many brokers that allows you to capitalize on price fluctuations without needing access to a lot of capital. Look today to see if your forex or binary option broker offers them for trading.