THE BLOG
08/12/2014 01:00 pm ET Updated Oct 12, 2014

The Casino of CFD Trading

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I posed a question to a lady at my CFD (Contracts for Difference) provider the other day, which was about something I have often wondered. I said, "how do you earn your money?", to which she responded with, "well, its complicated." I then had a think and said, "does it work that when I make a profit you make a loss, and when I make a loss you make a profit?", to which she simply replied, "Yes." So my first thought to her final response was, oh, they obviously operate just like a casino or sports betting agency.

In case anyone doesn't know what a CFD is; they are derivative products that give the opportunity for people to trade a contract for an underlying asset, this being anything from commodities, to forex or the share market. Participants can go long or short (buy or sell) these contracts in anticipation of seeing them moving in the direction they anticipate. These products are highly leveraged, often allowing people to use just five percent margin. So if underlying assets do move in the right direction, people can make a lot of money. But, if they move the wrong direction, people can lose a bunch of money.

The best and simplest way I've heard CFDs explained as is, "they're basically a way of borrowing to gamble." So people shouldn't take trading CFDs lightly. Just as they shouldn't take gambling in a game of black jack lightly. It is most important for people to remember when trading CFDs that they should never 'bet' the house. Because no matter how many times you are right on an underlying asset movement, there will be a time when you do not get it right. People should also make sure that they develop and stick to their own trading strategy resolutely, because if they take trading as just having a flutter like a small sports bet, they will (because of the use of leverage) lose their shirts. Above all though is the fact that they should remember that their CFD provider is not on their side. The provider is actually operating with opposite motives. All their job is, is to provide you with a platform that gives you an opportunity to trade the underlying assets. The job of studying and developing a profitable strategy is the individuals own obligation.

It is easy for people to think there is something morally wrong with CFD providers, or gambling casinos. But this assumption is not correct. Their only job is to provide you with a platform for entertainment, and that they do. It is true that people can become addicted with gambling or with trading, but as with anything in life there is always a possibly that people can become addicted; be it with cigarettes, or food, or anything else.

What my main points to say to those prospective CFD traders out there; is to remember to do your study, have a strategy and stick to it. Don't 'bet' the house, and make sure to focus on using your strategy to generate profits in the long term, rather than the short term. These principles are in fact important to implement in life, and traditional business as well; focus on the long term, have a plan and make a start, but not without first knowing what you are doing.