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Is CFD Trading equivalent to Gambling?

Is trading CFDs gambling?
Written by Andy

The following question is often posed: Is CFD trading equivalent to gambling? The answer is not black or white. Depending on how much research, analysis, and understanding you have of the underlying financial instruments, and the CFD market, your ‘results’ will vary accordingly. Traders who simply select bullish or bearish positions with no regard to the technical and fundamental factors of the underlying financial instruments are effectively gambling. It’s like betting on a coin toss.

If people traded CFDs in that way, then you would be far better off competing for Everybody’s Jackpot available from in the United Kingdom. At least there, every player stands an equal chance of winning. With CFDs, the overwhelming majority of traders will fail, because they don’t understand what they’re doing.  It isn’t easy to accurately forecast price movements with CFD trading, precisely because so many intricately connected, and disparate market factors are in play.

Gambling per se is the wagering of money based on unknown variables. There is generally limited skill involved, save for a few commonsense practices. For example, bankroll management is an important component of gambling. Strategies include careful selection of games – similar to the selection of financial instruments to trade. It’s always best to pick the options that you understand and enjoy.

Like CFD traders, online casino players understand that there is risk involved in every decision. The trick is picking options that offer the greatest returns. The risk/reward ratio is what drives trading and gaming behavior. However, there is absolutely no doubt that success in CFD trading is a function of knowledge. That being an innate understanding of market mechanics, with a dollop of Lady Luck thrown in.

With trading, the odds are binary – you either finish in the money or you don’t. With gambling, it’s much the same. But there is a caveat. There are specific RTPs (Return to Player Percentages) with casino games, and players can pick games with high RTPs over games with low RTPs. The games with high RTPs include blackjack, baccarat, and video poker. Games like Keno, scratch cards, slots, and Lottery Games have low RTPs and considerable house edges.

Contracts for Difference (CFDs) are derivatives trading instruments. CFD traders effectively speculate on the financial markets. The difference between trading CFDs and trading stocks, forex, commodities, or indices is that you don’t own any of the underlying assets with CFDs.  By speculating on price movements of financial instruments, sans ownership interests, the entire process is simply a parallel market.

With CFDs, traders agree to exchange the price differential between the underlying asset at the point at which the contract is opened, through to the time the contract closes. The operative word with CFD trading is forecasting. Accurate forecasts – bullish for bearish – yield profitable outcomes.

Traders can go long on CFDs with an optimistic perspective on future price movements.  The other option is to go short on CFDs by taking a bearish perspective on the future price of the CFD. Either way, profits stand to be made when CFDs are traded. Many other factors come into play with these contracts for difference, which are hugely popular in the United Kingdom, and continental Europe.

For example, margin and leverage are useful resources to expand the profit potential of trades that go your way. A 10% margin, for example, indicates that just 10% of the trade value is needed to open that particular position. Margin and leverage go hand-in-hand. 10% margin is the equivalent of 10 X leverage. A 1% margin is the equivalent of one of 100 X leverage. The greater your leverage, the bigger your potential profits, or losses. Therein lies the risk with CFD trading. And that’s a wrap!

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