Back To Top
The CFD – Contract For Difference, is one of the types of trading instruments, which offers global traders and investors an opportunity to make use of the price movement of the underlying asset in either direction. In CFD trading, the traders typically don’t own the assets they trade. The high leverage and low costs of CFD trading make it a feasible option for aggressive traders, despite the possibility of capital risk. Tradingcritique.com briefs the in and out of CFD trading from beginners to experienced traders in a quite logical way.
A CFD contract is relatively a simple security calculated by the asset’s movement between trade entry and exit, computing only the price change without consideration of the assets underlying value. It is a contract between two parties where they agree to pay the difference between the opening price and closing price of a particular market or asset. When traders trade with CFD they do not own the actual asset’s rather they will speculate on the price movement, up or down.
On commission-free CFD trading, the spread includes the cost of the trade. Hence, the tighter the spread, the quicker you earn profits once the price moves into the profit-earning territory. For example, if the spread is 10 cents, the stock price should gain 10 cents to hit the break-even trade. In case of price movement in the opposite direction, you will be at a loss.
For example in a conventional broker account, if the stock meets a bid price of $51, then the gain is $100/$2500 = 4% profit. However, when the national exchange reaches this price, the CFD bid price will only be $50.95, lowering the CFD profits. This is because the trader must exit at the bid price as the spread is getting larger than on the regular market.
In the same above example, a CFD trader earns an estimated $96/$250 = 38.4% returns on his investment. The CFD broker may also insist the trader buy at a higher initial price of $50. Even in such cases, $94 to $96 earnings denote a net profit.
The aforementioned is only an example of a winning trade in CFDs, yet the loss calculation of the losing trades slightly differs. There are also other considerations such as overnight holding and rollover charges etc.
Choose a Market – There are many individual markets to choose from, including currencies, commodities plus interest rates and bonds. Select the market which you have a good understanding of so it will help you respond to market advancements.
Trade Size Selection – You have to select the size of CFD’s you want to trade. With a CFD, you control the size of your investment. So choose how many CFD’s you want to trade. 1 CFD is equal to 1 physical share in equity trades.
Choose to Buy or Sell – Select ‘buy’ if you think the price will increase or ‘sell’ if you think the price will decrease. If you buy you have to go long and if you sell you have to go short. The price of your CFD depends on the price of the underlying asset.
Add Stop Loss – You have to add stop loss so that you can close your position out at a certain price if it moves too far against your price.
Keep an eye and Close your Trade – After you placed your trade, you can see the profit/loss update in real-time at the screen. So you can exit trades by clicking on the close trade button.
ADVANTAGES
DISADVANTAGES
Escape Strategy – You have to identify a key price level for given security. When the price hits your key level, you buy or sell, dependent on the trend. The important thing to remember with the escape strategy is to stay away from any trades when the market is not providing clear signals. If you cannot identify where the trend is moving then just give it a miss. Use charts to identify patterns that tell you where the trend is heading.
Contrarian Investing – This is actually a market timing strategy. If a stock has seen its price trending lower, then you pick a point you believe to be at or near the end of that trend, and buy-in expectation of a move in the opposite direction. You can do the same thing in reverse by short selling a stock that has been increasing in price, in expectation of a sudden change in price direction.
If you trade CFD you do not need to trade overnight but you can place a high number of CFD trades in a day. To get higher returns you will have to focus on liquid elusive market. CFD trading with Gold, Bitcoin, Currency pairs is also the best example.
Trading Plan – There should always be a good trading plan. Long-term and trade by trade goals, style of trading and target markets, money management, trade identification system and risk management rules.
Trading Journal – You have to keep all the records of your trades entry and exit positions, your reason for entry and exit and observations about the trade.
Stay away from emotions – Emotions are the biggest barrier to implement your CFD trading plan. You will receive shocks from the markets still you should be confident. Do not chase your losses by risking more than you intended. Losses are a part of your trading process so be patient and achieve your goals.
Money Management – In this CFD trading you need to pay more attention to your capital outlay on individual positions, as CFD’s are a leveraged form of investment. You should only use a margin of your deposit to open a position, not the entire contract value. It will increase your return on your investment. This will also increase the risk.
Try before you start. Many brokers offer demo account for easy access to the traders when they start with their real accounts. This gives some training for the traders at the start.
Brokers also offer education to their traders through e-books, pdf documents, live webinars and expert advisors. So you have to analyse these things before opening an account.
CFDs trading is quite challenging and used generally for hedging purposes by the investors. One needs to expertise the CFD trading mechanism to minimize the chances of losses. It is necessary for the traders to make use of the educational resources by maintaining a regular practice of learning to build their own trading strategies.
Discover the world of forex trading with our comprehensive guide. Learn essential strategies and risk management, tips, and gain expert insights to start your forex journey confidently. From beginners to experienced traders, find how to trade forex profitably and make informed trading decisions.
Founded in 2005, FP Markets is a leading online broker renowned for its exceptional trading conditions and commitment to client satisfaction. This comprehensive guide will help you learn about FP market regulation, account types, financial instruments, trading platforms, etc.
Ethereum is a decentralized blockchain platform that enables smart contracts, enabling secure, and peer-to-peer transactions without a central authority. It supports decentralized applications and is part of the DeFi movement, with Ethereum 2.0 aiming for improved scalability, security, and sustainability.
Investing in cryptocurrency involves selecting the right cryptocurrency and securely storing your investment, following a step-by-step guide will help you get started.
Traders look for the currency pair price movements, their patterns, and their tendencies in order to predict future moves. There are no hard and fast rules to select the chart type because each chart has its own advantages and disadvantages.
Are you seeking for safe investment with predictable returns? Our 2024 guide unlocks the world of bond investment, helping you navigate this secure investment option. Learn what bonds are, explore different types, and discover how they work to generate predictable income.
