One of the most attractive aspects of Forex trading is the wide availability of trading options. CFD trading is one of these options and refers to “buying and selling CFDs”. CFD stands for “contract for difference”.
CFDs are considered a derivative product because they allow you to speculate in financial markets like stocks, forex and commodities without having to own these assets. When you trade a CFD, you agree to exchange the difference in price of an asset between when the contract is opened and when it is closed.
Trading short and long CFDs
CFD trading allows you to speculate on price movements in both directions. You can mimic a traditional trade which profits as the market price rises, and you can also open a CFD position which will profit as the underlying market price falls. This is called selling or ‘short CFD’, in marked contrast to buying or long CFD’.
How to trade CFDs
CFD trading is leveraged, which means you can expose yourself to a large position without having to incur the full cost upfront. You should take into account that your profit or loss will always be calculated on your total position size. It is strongly suggested to pay attention to the leverage ratio and check that you are trading within your limits.
Leveraged trading can also be called “margin trading” because the funds required to open and maintain a position, which is the margin, is only a percentage of its total size. There are two types of margin: a “deposit margin” is required to open a position, and a “maintenance margin” may be required if your trade is about to incur losses that the deposit margin cannot cover. .
How do CFDs work?
Now that you understand what CFDs are, you need to know how they work. These are four of the key concepts in CFD trading: spreads, trade size, durations and profit/loss.
CFD prices are quoted at two prices: the buy price and the sell price. The sell price is the price at which you can open a short CFD. The buy price is the price at which you can open a long CFD. The difference between the two prices is called the “spread”.
CFDs are traded in standardized contracts. The size of an individual contract can change depending on the underlying asset being traded, often mimicking how that asset is traded in the market. The contract size is usually representative of one share of the company you are trading.
Most CFD trades do not have a fixed expiry. Instead, a position is closed by placing a trade in the opposite direction to the one that opened it. If you keep a daily CFD position open past the daily cut-off time, you will be charged an overnight funding fee.
profit and loss
To calculate the profit or loss from a CFD trade, you need to multiply the trade size of the position by the value of each contract. Later, you multiply this number by the difference in points between the price when you opened the contract and when you closed it. For a complete calculation of the profit or loss of a trade, you must subtract any fees or commissions you have paid.