If you’re someone who has never traded CFDs before, it would definitely stand for ‘Confusing Financial Details’ but once you know what it is, you will get to learn that CFD is Contracts for Difference and that trading them is much less technical than what it may first appear as. In order to gain a comprehensive explanation and understanding of what CFD trading is, you have to go through the concerns of the entire article. We have outlined what CFDs are and we have provided you with steps of how you can begin trading CFDs.
What is a CFD?
CFDs have undoubtedly become a very popular form of investing in today’s world and it is also gaining momentum among online brokers. A CFD is a tradable asset which will be a reflection of the price of any other underlying asset. A Contract for Difference is more like a contract between you and your broker where you agree to pay each other the difference of price of a specific financial instrument when you start trading and when you close the trade on the final day. Assets can be stocks like Apple or other commodities like gold.
Trading CFDs – How do they work?
Whenever the cost of an asset increases by about 5%, your investment is also said to increase by a value of 5%. Suppose you opened a long position on Apple and you bought $100 worth stock through CFD. In case the price increased by around 5%, your investment would then be $105. In case you closed the trade at this point, you could have made a profit of $5.
Step-by-step guide of trading CFDs
Here is a breakdown of the few steps which offer a brief review of how you can trade CFDs.
- Select the financial asset: The first step that you need to take is to select the instrument, like USD/EUR or UK 100 on which you wish to trade. CFDs are offered across a wide range of global market which includes indices, forex, shares, commodities and treasuries.
- Choose to sell or buy: If you think for the long term and you wish to go on with the trade for a long time, buy them. On the other hand, if you want to go short, sell, especially when you think prices will drop down.
- Choose the size of the trade: Decide on the units which you wish to trade. The value of a single CFD will vary depending on the asset that you will choose to trade.
- Tackle your risk: Choose from the wide range of stop-loss orders which include GSLOs or Guaranteed Stop Loss orders. They work in a similar manner as the regular stop-loss orders apart from the fact that for a specific premium, they assure you to close out of the trade at the price which you mention, irrespective of the market gapping or volatility. The premium will be refunded in case the GSLO isn’t triggered.
- Supervise the position: Once you place the trade, you have to keep monitoring the open positions so that you can get a clear idea on the real-time profit and loss. There might arise a time when the losses can surpass your deposits.
- Close the position: In case your trade isn’t closed automatically, you have to close the trade yourself whenever you think you’re ready.
As we know all sorts of trading includes some level of risk. You should only risk the money that you are prepared to lose. Don’t be sure about your future results based on past performances. If needed, get help of a professional trading agent.