Crypto Academy Week 10 - Homework Post for @kouba01 | Crypto CFDs

Hey there! I’m glad to be talking about Cryptocurrency Contracts for Difference, also known as Crypto CFDs. I’d focus on the how to determine a CFD, trading strategies, the risks involved and brokers that support this form of trading.

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What is a cryptocurrency CFD?

Cryptocurrency Contracts for Difference (CFD) trading is by far different from crypto spot trading. In spot trading, you’d have to purchase the crypto you want to trade, whereas CFD trading involves a contract between a trader and a broker. So in a real sense, the trader does not open a position in the crypto market.

In crypto CFD trading, you can simply predict the movement of a particular crypto. If you predict that there would be an increase in price, you simply long (i.e buy) the crypto. While if you predict it will go lower, you could short (sell) the crypto. This makes it possible to make profits even in a falling market, like during a bear market.

Well, that is quite different from what many people understand about crypto trading. I’d say it’s closer to crypto futures trading than spot trading. That’s because in spot trading the trader will have to open a position in the crypto market.

Like every type of trading, crypto CFDs has its benefits and drawsbacks. Let’s see a comparison between crypto CFDs, spot trading and futures trading.

	Crypto CFD	Spot trading	Futures trading
Leveraged trading	Yes	No	Yes
Short (SELL) and Long (BUY) positions	Yes	No	Yes
Direct trading	No	Yes	No

How do I know if cryptocurrency CFDs are suitable for my trading strategy?

There are a lot of things to consider when you want to determine the suitability of your trading skills and strategy for CFDs.

First, you have to think about your own goals and how well you understand the basic concepts of trading. Do you only want capital preservation or want some quick gains? If you simply want capital preservation, then crypto shouldn’t be your focus. Are you very emotional? Will a loss affect your health? These are some valid questions that requires your response.

The preferable trading strategy should contain a number of things; when you intend to leave trades and when you want to enter new trades. You’d also have to spend some time monitoring the market in order to understand the market. It’s best to have a grasp on anything you want to put your money on.

Would you prefer scalping, or would rather be a swing trader or day trader? The strategy I prefer may be different from what works for you. As individuals we want to adopt the trading strategies that work best for us. When you stick to the strategy you’ve already planned, it’d be more difficult for greed to distort your trades.

Technical analysis, fundamental analysis and sentimental analysis can help you to make better CFD trades as well. A combination of technical and fundamental analysis will give a result that is backed by data and the history of the crypto you want to trade.

One mistake you can make with CFD trading is not to understand your total lot size. Since crypto CFD trading is leveraged, you can lose more than the amount that is committed to a trade. Hence, you need to reduce your exposure by setting stop losses and risking only the amount you intend to trade.

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Are CFDs risky financial products?

All exchanges and broker will often tell you that cryptocurrency trading is high-risk. If you trade a coin on spot, there’s always a possibility of losing that money. CFDs on the other hand are leveraged, hence there’s even a greater likelihood of losing more money than spot trading. I’ve lost money on futures trading before, so I know how depressing it could be.

In order to reduce the risk with CFD trading, it is best to spend some time to understand the possible risks. Hence, you would understand how to reduce the risk. Disciplined traders usually make money with leveraged trading, whereas inexperienced traders usually lose theirs. That’s why it is best to always continue to develop one’s self as a trader.

If you’re not careful with crypto CFDs, you can end up losing a lot of money. Nevertheless, risk management strategies and attitude to risk is quite important aspects of trading you should not overlook.

Do all brokers offer cryptocurrency CFDs?

No, not all. When you log into the website of some of the most popular brokers you’d not find crypto CFDs on their trading lists. However, there some nice brokers that support that form of trading.

Some of the brokers that support crypto CFDs include OctaFX, AvaTrade, eToro, CMC Markets, IQ Option, eToro, Forex XM and Plus500.

Explain how you can trade with cryptocurrency CFDs on one of the brokers (Using a demo account)

For the Purpose of this tutorial I’d be using my Octa FX account along with a MetaTrader 4 application.

Email from Octa FX displaying my user login information. (I’ve had this account since last year)

This is my profile on Octa FX.

Now, head over to where you can trade assets and click on the “trade crypto” button.

Octa FX then shows the minimum leverage for CFDs and some of its features.

Then, you download the MetaTrader 4 app if you don’t have it already

On MetaTrader app, I login with a username and password that was generated on my Octa FX account. This trading account is connected to the funds in my broker account.

This page shows only forex trades, in order to display crypto CFDs you have to click the (+) button at the top right corner.

Now, you can click on “crypto.”

This shows the available crypto CFDs on Octa FX. For the purpose of this tutorial I’d pick the LTC/USD pair.

This is the chart of LTCUSD. With the aid of technical analysis and fundamental analysis, you can try to determine where the market is headed.

On this page, you can decide to long or short the LTCUSD pair. Short is symbolised with “Sell the market”, and long with “Buy the market.” There is also space for you to input your Stop Loss and the price you’d like to take profit.

Conclusion

Crypto CFDs is amazing if you know what you’re doing. If you think the risk is too high, then this form of trading is not for you. Personally, I’ve lost some funds to leveraged crypto trading in the past. But that didn’t stop me from trading crypto, rather it motivated me to learn about techniques that has improved my understanding. And I’ve learnt to always reduce my exposure.

Thanks to @kouba01 for his lecture, and for also giving us the opportunity to talk more about this type of crypto trading.