What is CFD Trading?
Contract for differences (CFDs) are contracts that are tradable between clients and a broker. When trading a CFD, there is an exchange of the difference in value (current value and value at the end of the contract) of a certain instrument.
These can be CFD shares, indices, commodities, currencies, treasuries, precious metals, crypto etc
One of the biggest advantages of trading CFDs is that traders may speculate on price movements without the need to physically own the underlying assets. Traders will usually buy or sell a number of units depending on whether they think that the price of the financial instrument will increase or decrease.
CFD Currencies
Australian Dollar, Swiss Franc, Euro Dollar, British Pound
CFD Shares
Apple, Ebay, Microsoft, Facebook
CFD Indices
Dow Jones, Germany 30, Japan 225, Mini Nasdaq, Mini S&P 500, UK 100
CFD Energies
UK Crude, US Crude, Natural Gas, Heating Oil
CFD Commodities
Sugar, Soybean, Wheat, Coffee, Corn
CFD Treasuries
German Bund Futures, 2 YR/ 5YR/ 10 YR US Treasury
CFD Metals
Gold, Silver
CFD Crypto
Bitcoin vs US Dollar, Bitcoin Cash vs US Dollar, Ethereum vs US Dollar, Litecoin vs US Dollar, Ripple vs US Dollar
CFDs
Main features of trading CFDs
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Market is open 24/5
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High liquidity
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Lower costs
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More trading capacity thanks to leverage
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Possibility to profit/lose whichever way the market moves (upwards or downwards)
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More chances of limiting risks by the use of stop loss orders and risk management strategies
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CFDs can be more predictable with the study of technical and fundamental analysis
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Trading is available via several trading platforms; desktop, mobile, web.
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Trades can be automated or semi-automatic (EA)
How to trade CFDs?
CFDs can be traded based on margin % and are determined by the contract size, leverage, pip value and direction.
-For short positions, client opens a trade based on the ‘Bid’ price and closes the position based on the ‘Ask’ price.
-For long positions, client opens a trade based on the ‘Ask’ price and closes the position based on the ‘Bid’ price.
Note: Trading of CFDs may involve other fees.
Example:
Microsoft (Symbol: MSFT) contract size: 1,000 shares
Margin requirement: 5%
Account leverage: 1:20
i.e. Client trades 1 lot of MSFT = 1,000 shares
Required margin for 1 lot = 1,000 x 96.85 x 5% = $4,842.59
Positive outcome
Client decides to go long on 1 lot of MSFT:
Opening of position based on ‘Ask’ Price: 96.85
Closing of position based on ‘Bid’ Price: 98.85
Difference in price = 98.85 – 96.85 = + 2 x 1,000 = + $2,000
Negative outcome
Client decides to go short on 1 lot of MSFT:
Opening of position based on ‘Bid’ Price: 96.85
Closing of position based on ‘Ask’ Price: 98.85
Difference in price = 96.85 – 98.85 = – 2 x 1,000 = – $2,000