There is an easy way to think about CFDs, which are complex financial instruments. They can be viewed as ‘shares in disguise’. When you buy or sell a share, you are doing it with the hope that the price will go up or down; when you trade CFDs, your price movement is amplified according to how much leverage is used. This results in more significant profits than trading shares without using leverage.
Of course, all of us want to use leverage wisely and not lose money in the process. New traders might want to stick with shares for some time before jumping into the world of CFD trading in Singapore. However, after gaining sufficient knowledge and experience, they should consider giving it a try via online brokers who offer high levels of leverage to their clients.
The five golden Rules for CFD Trading in Singapore
Let’s review the five golden rules which will make your trading experience safer and more profitable. Some of these rules are relevant only when you trade with high leverage levels; others apply regardless of the amount used.
If you don’t Understand it, you can’t do it.
There is no other way around this rule. The first step before opening an account is to learn about CFDs and how they work, what kind of market risks are implied and how they affect your positions. You should read all the information provided by your broker, including the ‘terms and conditions or ‘terms of business.
Familiarise yourself with your broker’s trading platform, which you will need to use for placing orders. Depending on the type of account, research some price patterns relevant for CFDs in Singapore.
Be Aware of all Costs Involved.
Your broker will charge fees for opening an account, depositing funds into it and withdrawing your profits. These fees may be commission-based or a percentage of the amount traded. As well as these flat fees, there might also be some hidden ones like overnight financing charges (overnight interest rates).
For instance, if you buy 100 shares worth $1 each in SGX stocks at 10 am when the overnight rate is 2%, your broker will charge you $10, which means that if the 10 am price was 1% lower than the 9.59 am price, you would have lost money.
Understand what a Pip is and how it Affects your Positions
Over-the-counter brokers often quote prices in fractional pips (0.0001), while most markets are quoted to four decimal places (0.00001). A pip stands for ‘price interest point’ and measures how much a price has changed over one unit of time, which could be hourly, daily or weekly. The higher the leverage used, the more critical it becomes to keep an eye on this figure when trading CFDs in Singapore.
Understand the difference between a EUR/USD share and a Eurodollar
Eurodollars are US dollars deposited in banks outside of America, in Europe. The term is used to denote the rate at which these deposits can be converted into normal cash – it could be 1.2245 today, but tomorrow this amount may have increased or decreased due to market moves. Pay close attention to how your broker calculates its LIBOR rates – if they use daily fixing instead of overnight rates, you will get less accurate quotes.
Don’t Believe Everything you Hear.
All kinds of rumours circulate on financial markets, most of them untrue. Spread betting firms are known for spreading false news about companies they have a position in to influence the price in their favour. Be highly critical when reading news from various sources and assess whether a piece of information is relevant or not.
Bottom Line
Be critical when reading news about your financial investments and make your assessment of whether or not something will affect markets before making an investment decision. Keep calm and never risk more than you are willing to lose when trading CFDs in Singapore. Beginner traders are advised to contact a reputable online broker from Saxo Bank and trade on a demo account before investing their money. For more information on Saxo Bank, navigate here.