Leverage with derivative trading

Trading with leverage​​ on derivatives involves entering into a buy or sell position and speculating on which way their chosen market will move, using a reasonably small margin/deposit. Without the investor actually owning the underlying asset, their profits or losses will correlate with the performance of the market. However, leverage will cause these profits/losses to be magnified when compared with buying the underlying asset outright.

Risk management

To mitigate the risks in trading leveraged derivatives, it is important to plan a trading strategy​​ in advance. A popular risk-management tool traders can use when trading with leverage is a stop-loss. By implementing a stop-loss order​ to a position, a trader can limit losses if the chosen market shifts in an unfavorable direction. However, it is important to be aware of potential risks, such as the market experiencing a negative short-term fluctuation, which could activate the stop loss order before the market conditions improve again.

CFD trading

CFD trading stands for “contracts for difference”, it is is another leveraged derivative product that enables traders to speculate on short-term price movements. It is a contract between two parties on a peer to peer basis to exchange the difference between the opening and closing prices of a specified financial instrument at the end of the contract.

Similar to spread betting, you do not actually own the underlying asset. Instead, you buy or sell a number of contracts for a particular asset depending on whether you think the movement of price will rise or fall. You gain multiples of the number of CFD contracts you have bought or sold for every point the price of the instrument moves in your favor. In the opposite scenario, when the price moves against you, you will register a loss.

There are a number of benefits of trading CFDs​​, such as the ability to trade on the price of a product that is falling as well as rising. Therefore, you can aim to benefit from going short and selling as well as buying opportunities, which is also true for spread betting. Through periods of short-term volatility, many investors trade CFDs as a way of hedging their existing portfolios.

There are a number of risks of trading CFDs as well, which traders need​​ to be aware of and it is advised to be aware. Gapping is one example, this occurs when the price of an asset suddenly moves from one level to another, without passing through the level in between. Traders may not always have the opportunity to place a market order between the price levels. Gapping arises as a result of market volatility. It is possible to limit the risk and impact of market volatility by applying a guaranteed stop-loss order. Another important aspect to be clear on are the costs associated with trading CFDs, they are holding costs​​. These are charged to a traders account if they hold such positions on certain securities overnight.

Forward trading

Forward trading​​ is a transaction between a buyer and seller to trade an asset at a future date and at a specified price, this can be a digital or physical asset. The forward contract’s value is based on the stability of the underlying asset and it includes the agreement of the asset price via a smart contract and trade date. Forward trading is an alternative to purchasing an asset at spot price.

An advantage of forward contracts is that the agreement to buy and sell at a specific price in the future ensures that a buyer of a Forward Contract is protected from unfavorable market movements, so if the market should rise dramatically they would have a locked in price. A seller would have the opposite effect.

On the flip side, it can work against a buyer should the underlying value of an asset should drop, they are locked into a specific price and cannot take advantage of better pricing. For a seller this is the opposite as it would have the opposite effect.