Over the past year, cryptocurrencies have been a hot topic in Mena region countries.
There is a perceived risk of fraud and an uncertain economic outlook from the price volatility of cryptocurrencies. Many investors take advantage of this opportunity to make returns on previously unattainable investments.
This article will give you a brief overview of how CFD trading works and what it means for cryptocurrency markets in MENA region countries.
What is CFD trading?
CFDs (Contracts For Difference) allow traders to trade financial instruments such as stocks, indices, commodities and cryptocurrencies without buying them directly.
It is done by using leverage to amplify the return on their investment when prices go up or down. The ‘difference’ in this case refers to the difference between the price of purchasing an asset called a CFD contract and selling it.
This difference will be money made or lost, depending on how prices move.
How does CFD trading work with cryptocurrency markets?
Like forex markets, speculators trade cryptocurrencies, hoping for profits from upward movements in market prices. They do so by buying at lower prices and selling when the price increases, pocketing any differences in profit. Similarly, suppose they believe that market prices will decrease over time.
In that case, they sell at higher prices than what they paid initially, hoping that this loss is less than what was previously paid before buying again once the price drops below its previous low point.
The benefits of CFD trading with cryptocurrency markets
There are no brokers involved as bitcoins and altcoins can only be traded on exchanges.
The high volatility associated with cryptocurrencies makes it possible to make large profits in a short amount of time, far more than traditional stock market investments.
Many cryptocurrency exchanges offer leverage up to 1:10 so traders can increase their investment ten times without providing the entire sum upfront.
Traders should note that leverage should not be confused with margin trading. An individual must also contribute funds and multiply them against an asset’s price movement according to the level of leverage chosen.
Bitcoin is generally considered one of the least risky cryptocurrencies available because its value is not bound to any other commodity or currency. Other cryptocurrencies are based on the price of another commodity, such as gold.
When prices increase, their value is recalculated against USD and other fiat currencies to account for any fluctuations in bitcoin’s value due to changes in its price.
It also allows traders to gain more by using less initial capital at higher leverage ratios. They may make ten times more profits with X money, depending on how prices move.
A two-step guide
Choose a CFD trading company
They should offer cryptocurrency markets and traditional asset classes such as forex. They should also provide different leverage levels up to 1:10 for those who want to use smaller sums through accounts with several hundred dollars worth of Bitcoins but for whom smaller amounts are not enough to give the desired leverage ratio.
Backtest your trading strategy
Conduct a backtest by choosing a period and entering an initial capital amount you want to use for your trade. It allows you to see how much would have been made or lost had you used this approach over the last few years, even though past performance is not an indicator of future results.
The advantage of doing this is that you can fine-tune your trading strategy based on the actual data versus just relying on gut instinct which may be influenced by current market conditions rather than actual returns from using this approach in the past.
Use a long period to give accurate results but short enough for relevant comparisons; otherwise, you will get distorted values due to volatility. The disadvantage is that you need a significant initial capital amount to stay in the market long enough. Otherwise, your profits will be too small to make it worth your while.
Test out various approaches with different leverage ratios and variable amounts until you find one that suits both your risk tolerance preferences as well as an overall strategy. In addition, consider how much you would put down as collateral or margin versus how much of the total investment is from your pocket before committing any more funds.
Link to Saxo Bank Dubai for more information