CFD Trading guide for the UAE and Dubai

Table of contents

Dubai is situated in the eastern part of the Arabian Peninsula, on the southeast coast of the Persian Gulf, representing one of the seven emirates that make up the United Arab Emirates (UAE).

Oil-rich Dubai is doing its best to diversify its economy and invests heavily in infrastructure, tourism, innovations, technology, business, trade, and renewable energy.

Financial trading, especially Forex and CFD (Contracts for Difference) trading, is becoming increasingly popular in Dubai. The main regulatory authority overseeing financial markets in the UAE is SCA (the Securities and Commodities Authority). Let’s delve deeper and learn more about trading in the UAE.

Understanding CFD Trading

Contracts for Difference (CFDs) are financial assets that allow traders to speculate on the price movements of underlying instruments without owning them. You can find CFDs on various asset classes, including stocks, indices, commodities, currency pairs, and bonds. Trading CFDs have a couple of advantages over trading physical assets, let’s discuss those advantages in more detail:

  • You can use leverage to trade CFDs: leverage is a key feature in CFD trading, as it allows traders to control a much larger position size with small deposits. Traders should use leverage in caution, as while leverage helps to amplify returns, it can also magnify the risks of losses.
  • CFDs can be traded in both directions: CFDs can be traded in both long and short direction. While physical assets can only be profitable when you buy them at low price and sell at high price. When markets are falling, traders can short CFDs and make money in bearish market conditions.
  • CFDs have better liquidity: higher liquidity brings lowest market spreads that make price speculations more profitable.
  • It’s easy to access CFDs: CFDs are widely available in financial markets. And most CFD brokers have low barriers to entry. Account opening and registration takes less than a couple of days and is fully digital. In addition, thanks to leverage, traders do not need to invest a huge amount of capital into CFDs.

On the other hand, it should be mentioned that CFDs have their own drawbacks compared to physical assets. CFDs are great for short and medium term market speculations due to the reasons we’ve mentioned above, but they are not for investing long term. For investing long term physical assets such as real stocks, crypto coins, or physical precious metals are preferred.

Getting Started

When starting out a trading journey, traders are faced with multiple challenges. First, they need to learn the trading terminology and trading basics. Quality education is key to success in financial trading. Traders need to educate themselves about various instrument types and their characteristics. Each instrument class is different, and each asset price is affected by different factors. It’s important to learn how to conduct technical and fundamental analysis, and build trading strategies.

Before opening a live account, it is important to have clearly defined goals and objectives. When traders plan to remain in the industry long term, they learn risk management strategies thoroughly and try to manage drawdown periods well. Stability and low risk taking is tremendously valued in financial markets. To investors, it’s more important to grow your account step-by-step and take low risks, than taking huge risks and bringing great returns.

Once traders learn the basics, learn how trading platforms work, and have clear and achievable goals, the next step is to find a financial broker. There are plenty of well regulated reputable brokers with a wide selection of tradable instruments and low fees, such as XM, Ava Trade, and Plus500.

Finding the most suitable broker is never easy as there are so many different companies to choose from, and they all have different offerings. First, it’s best to make a list of all the qualities that you’re looking for in a broker. It’s important to avoid opening a live account with an unregulated one, as there are many scammer companies hunting for inexperienced traders. Regulated brokers are under constant monitoring from regulatory bodies and therefore can be trusted. In addition, make sure that your broker offers all the trading instruments and access to popular trading platforms. Some of the most popular Forex trading platforms are MetaTrader 4 (MT4), and cTrader. For multi-asset trading, the most popular software is MetaTrader 5 (MT5).

Find the broker that provides suitable trading fees to your strategies. If you are planning to trade actively and place multiple trades, it’s best to find a broker with the lowest spreads. Low spreads are crucial for day traders, scalpers, news traders, algorithmic traders, and High Frequency Traders (HFT). In case you plan to place orders less frequently, it’s best to find a broker with the lowest commissions. Low commissions are important for swing traders and position traders.

Make sure that your broker offers appropriate leverage and risk management tools. Leverage is often referred to as a double-edged sword, as it helps increase potential returns and risks simultaneously. However, for traders that use scalping strategies, access to high leverage is critical.

Furthermore, it’s important to find a broker with professional customer service. Most Forex and CFD brokers offer live chat, email and phone call options to their clients. Access to the live chat option is especially convenient for traders. Professional customer support helps solve problems fast and provide technical assistance to traders.

Once terriers learn about trading basics and select their financial broker, it’s time to learn how to conduct market research, risk management, and create trading strategies.

Market Analysis and Research

There are two main approaches to market analysis: technical analysis, and fundamental analysis. There are traders that base their strategies purely on technicals, and there are traders that only utilize fundamentals in their market predictions. And there are traders that use both methods simultaneously.

It’s difficult to say in advance whether fundamentals or technical approach to choose. It’s best for beginners to learn both approaches, try them in demo accounts, and find what works best for them.

Fundamental analysis

Fundamental analysis studies fundamental factors that impact financial asset prices. These factors include political and economic events such as:

  • Interest Rate Decisions: interest rates are determined by central banks. The rise in interest rates means that loans become expensive for individuals and businesses and as a result, less money gets printed. Decreasing money supply impacts both Forex pairs and company stocks. Lowering the interest rates have an opposite effect. When interest rates are low, money is easily accessible and businesses flourish, on the other hand, in the long run, increased money supply can cause inflation.
  • Inflation Rates: high inflation is bad for the economy and impacts both Forex and equity markets. When the inflation is too high, businesses suffer as calculations become more difficult. Central banks all around the globe are responsible for inflation rates. Central banks try to keep inflation at low, stable levels using multiple tools. The strongest tool for handling inflation for central banks is interest rates.
  • Unemployment Rates: Increase in unemployment is bad for the economy and impacts financial markets.
  • GDP Growth: Gross domestic product (GDP) is an important indication when it comes to assessing the strength of any given economy. Strong GDP readings are considered positive for the local currency, and negative readings weaken the local currency.
  • Trade Balances: trade balance numbers are an especially valuable indicator for forex traders. Positive trade balance is good for a local currency and strengthens it, while negative trade balance has an opposite effect.
  • Global Economic Events: global economic events such as military conflicts, trade wars, etc. affect financial markets.

Technical analysis

Technical analysis involves studying historical price movements on charts. This approach utilizes technical indicators, various chart types, and various time frames.

Chart patterns play a huge role in Technical analysis. Candle charts visually represent price movements and show important information in condensed space effectively. Technical analysis tries to find support and resistance levels.

Some of the most popular technical indicators that are pre-installed on most trading platform are:

  • Moving Averages: moving averages indicators are designed for trend trading. These indicators smooth out price data to identify market trends.
  • Relative Strength Index (RSI): This indicator measures change of price movements and speed of the changes.
  • MACD (Moving Average Convergence Divergence): MACD is a trend trading indicator that shows strength and direction of a trend.
  • Bollinger Bands: measures volatility and helps traders identify overbought and oversold market conditions.

Furthermore, technical analysis analyzes trading volumes, and tries to find trends. Traders that base their predictions purely on technicals, avoid opening trading orders during and before important news announcements. Political and economic news often causes radical price movements and increases volatility that makes the markets unpredictable.

Risk Management

Risk management plays a critical role in financial trading. Implementing effective risk management strategies help traders protect their trading capital and ensure that potential losses are controlled. The key aspects of successful risk management are:

  • Determining risk tolerance levels: every trader has different risk tolerance, in addition, each trading strategy requires different risk to reward ratios. Some traders spend more time analyzing the markets and place fewer trades. When trading activity is decreased, traders can take higher, more calculated risks. When traders utilize day trading strategies, they need to spread their risks on multiple trades.
  • Utilizing Stop-Loss Orders: Stop Loss (SL) orders specify the maximum loss a trader is willing to tolerate on a trade. SL orders automatically close the position if the price reaches a predetermined level, which limits the potential losses. However, it should be mentioned that slippage can occur on markets and prices get closed on unintended level.
  • Position Sizing: position size should be insignificant relative to the total trading capital. This way, traders can defeat greed and focus on overall strategy instead of any single bet. Profitable trading is never about any single trade, it’s about having a system that gives traders an edge that over the long run produces profits.
  • Risk-Reward Ratio: risk reward ratio can be different for each trading strategy. In general, traders with high winning rates can afford 1:1 risk to reward ratios. On the other hand, traders that have around 50% winning trades require higher than 1:1 ratios to stay profitable.
  • Stay disciplined and avoid revenge trading: in many cases, after losing a trade or series of losses, traders are urged to get the money back and open low quality orders. In normal circumstances, they would never touch such trading setups. The urge to revenge trade leads to overtrading and emotional trading that often ends in excessive losses. One strategy to avoid revenge trading is to have daily, weekly and monthly loss limits. For instance, when traders have 100 USD daily loss limits, they stop trading once they lose 100 USD that day, analyze what happened, and come back to the trading session the next day with a clear mind. It’s important to note that trading involves losing money. The key to success is to have enough winning trades that cover the losses and grow the trading account step by step.

Trading Strategies

Every trader has a different personality and skills. Success comes when a trader’s personality matches his trading strategy. For instance, individuals that can process information quickly and have fast fingers can become great intraday traders. And individuals that like to plan more and take into account many factors, can try their chances in position and swing trading. The most popular strategies are grouped in the following categories:

  • Scalping: scalping trading strategy is characterized by the execution of multiple small trades to take the advantage of minor price fluctuations in a larger trend. Scalping strategies are utilized by intraday traders and High Frequency Traders (HFT). These strategies require fast decision-making and larger than usual leverage.
  • News trading: significant economic and political events can cause massive fluctuations in asset prices. Economic and political event driven trading requires rapid execution and quick decision-making. Many technical traders avoid placing orders during such events, and typically news events are traded by market speculators and traders that hedge their positions. As a result, short term reactions to economic and political events are extremely unpredictable. Often, news traders place two pending orders in opposing directions so that wherever the price moves, traders can make profit. News trading is extremely risky and requires a professional approach.
  • High-Frequency Trading (HFT): as the name suggests, HFT involves executing numerous trades at extremely high speeds. HFT requires high speed internet and good infrastructure. In most cases, HFT is done by trading algorithms.
  • Day Trading: day traders open and close trading orders within a day. That way, they avoid rollover fees. Rollover trading fees, also known as swap fees, are interest that are charged for keeping positions open longer than a day. Day traders mostly rely on technical analysis, and require low spreads.
  • Swing Trading: swing traders typically open and keep active orders longer than a day. Swing trades can take a couple of days or even a couple of weeks. This trading approach seeks to exploit price swings within an established trend. Swing traders utilize both technical and fundamental analysis.
  • Trend trading: trend followers identify market trends and trade in the trend direction. This approach heavily relies on technical analysis and usage of trend trading indicators such as moving averages. When trading trends, often traders can identify entries and where to place their Stop Loss (SL) orders, however, Take Profit (TP) targets are not always clear. TP placement often depends on the strengths of a trend.
  • Algorithmic trading: algorithmic trading involves use of trading robots that are designed to execute orders automatically. Algorithms require robust back testing and constant monitoring.

Tips for Successful Trading

At first glance, financial trading seems like an activity that can bring easy money quickly. However, this is not true. All successful traders are hard workers. Producing consistent returns over a long period of time in financial markets requires hard work and dedication. Here are some tips that can improve your trading results:

  • Have a trading journal: trading journals help traders spot mistakes quickly and learn from their own failures.
  • Start small and focus on learning as much as you can. Financial trading is risky, especially for beginners. Traders should never risk more capital than they can afford to lose.
  • Work on your discipline: discipline is key to success for professional traders. Amateurs lose money in the markets because they do not know what they’re doing. Professionals lose money because they lack discipline. A disciplined trader can manage his emotions and trade like a robot. When trading results are not satisfactory, it’s not the fault of a trader, but a fault in a trading system.
  • Stay informed: keeping an eye on fundamentals is essential, even if you are purely a technical trader. Significant economic and political events can have a huge impact on asset prices.
  • Trade with a clear mind: avoid placing orders under pressure, stress, and fatigue. In case you are a retail trader, it’s best to have your own office space separated from any distractions.
  • Keep in touch with other traders: trading can be a lonely job, especially for retail traders investing their own capital. Networking with other traders can teach you a lot about financial markets, motivate you to trade better, and make friends.
  • Before you start your trading journey, get ready financially: trading is not a steady source of income. There might be months when results are even negative. It’s best to have an annual budget ready in advance and avoid being dependent on income generated from financial trading.

Wrapping Up

To sum it all up, financial trading is legal, regulated and increasingly popular in the United Arab Emirates. Trading CFDs in particular is extremely popular due to various factors such as access to leverage, ability to trade both long and short direction and accessibility. When learning how to trade profitably, traders need to learn the basics and terminology. It’s important to understand how to manage risks and emotions, and develop a trading plan with an edge. There are two main approaches to market analysis: fundamental analysis, and technical analysis. It’s best to learn how to conduct both to find out which system makes sense to you most. There are a million ways to make money in the market, and beginners need to try different strategies before they find the one that best suits their personality. In order to successfully speculate on asset prices, these tips may aid you: keep a trading journal, start small and focus on education and long term success, work on your discipline and emotional management, stay informed about ongoing market developments, be ready financially before embarking on the trading journey, trade with clear mind, and lastly, socialize with other traders.

FAQs about CFD Trading guide for the UAE and Dubai

Is CFD trading allowed in Islamic countries?

According to Sharia law and Islamic finance, paying and charging of interest is strictly prohibited. The interest is called “riba”. In order to enable traders of Islamic fate to participate in financial markets, brokers are offering swap-free account types. These accounts charge no interest, instead trading fees are increased in the form of spreads, commissions, and administrative fees.

Is CFD trading a steady source of income?

Trading financial instruments can be a steady source of income only for institutional traders that get regular salaries. For retail traders, trading is similar to running a business. There can be highly profitable months, and some months may even be costly. It’s best to plan your budget in advance in case you plan to retail trade CFDs, so that you can place trading orders without additional pressure. When traders are pressured to trade, they’re more likely to overtrade and make mistakes.

What’s the difference between real stocks and stocks as CFDs?

Contracts for Difference (CFD) instruments are best suited for market speculators and short and medium timeframe traders. Real stocks or also known as physical shares are best for long term investing. Physical stocks pay zero overnight rollover fees, that makes them perfect for investing long term. On the other hand, stocks as CFDs can be traded using leverage, have better liquidity, and can be traded in both, long and short direction.

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