Before we start talking about how to trade CFD, lets find out what these are! CFD (Contract for Difference) is the agreement between two parties to exchange the difference between the opening and closing prices of a contract.
In other words, CFDs enables you to speculate on the move between financial markets such as shares, indices, and bonds. If you believe the market price will rise in value, you ‘go long’ or buy; and your profits will rise in every increase in that price. In addition, if you believe the market price will go down in value, you ‘go shot’ or sell and your profits will rise with every fall in that price. If however the price goes against you, you will encounter a loss.
The profits or loss from CFD trade will be the difference in value between the starting and closing price of the trade. For example, if you go long or buy $500 CFDs of company ABC, at $320, the value position is 500 x 320 = $1,600. If the share price rises to $350 and you close the trade, the value at the end will be 500 x 350 = $1,750, giving you a Net-Profit of $150.
The Benefits Of Learning How To Trade CFD
One of the main advantages of learning how to trade CFD is the investment exposure you could receive for a comparatively small ‘deposital’ margin. The deposit rates usually begin at, as little as 5% for shares. This offers significant opportunities for leveraging your trading portfolio. It is important to remember however that using leverage can result in losses that exceed your initial investment outlay.
Therefore, to be successful, you will need to understand the effects leverage has on your trading. Your trading could result in losses that exceed your initial deposit.
How To Place A CFD
Step 1: Select A market
This could be anyone over fifteen thousand available markets depending on your trading platform. It could be a stock index (Such as the FTSE 100), Commodities (Such as Gold, Silver and Oil) and others.
Step 2: Buy Or Sell (Go Long or Short)
At this stage, if you expect a market to rise, you choose to buy or go long, and your profits will rise in-line with any increase in the price. Similarly, if you expect the market to fall or decrease, you choose to sell or go short, and your profits will rise in-line with any decrease in price. These are the basics laws you will learn when you start your adventure on how to trade CFD.
Remember, you will incur losses if the market goes against you.
Step 3: The Price
The prices are quoted in comparison to the trade you are intending to make. This means the price you can buy at, which is the bid and the price you can buy at, which is the offer.
Step 4: The Margin
This is the deposit that you must initially have in your account prior to placing a CFD trade. This is a percentage of the total trade value. A trade value is based on the current market conditions; you must have sufficient funds to cover the market requirements for all your open trades.
Step 5: Stop Loss And Limit Orders
As CFDs can amplify profits or losses, you may choose to play stop loss and limit orders on the trade to manage your profit and loss targets. These allow you to-automatically-close a trade cutting your losses if it falls below a certain value or mark or cashing up your profits when your goals are reached. This keeps your trading manageable and efficient, even when you are not logged in.
Step 6: Commission Charges
A small commission is usually charged with each CFD equity trade. These commissions vary depending on the market you are trading. However, if you place a CFD trade on a non-equity market, such as on an index or currency pair, you will not be charged any commissions; instead, the spread between the selling and buying price is wider.
It is advisable to monitor your trades at all times, no matter how familiar you are with how to trade CFD. If you reach your target, you can close the trade. At the same time, you can close a trade if you believe you are going to encounter a loss or if you are getting a loss.