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A CFD means a Contract for Difference and it is a type of derivative that enables world traders to speculate on the prices of fast-moving financial markets such as Forex, Equities, Energies, and Precious Metals.

Nowadays, almost all Forex brokers offer CFD trading, find online Brokers offering CFDs:  Online Forex Brokers |  CFD Brokers

 

Introduction to CFD Trading

As any other derivative, a CFD contract is priced based on the price of an underlying market or asset. The underlying instrument may be a Forex Currency, a Stock, an Index, a Commodity etc. When you open a CFD trading position you never own the underlying asset, you simply gain or loose according to that asset’s daily value changes. A CFD is actually an agreement between two parties in order to exchange the difference between the starting price and the closing price of a particular contract.

Advantages of CFD Trading

1. Huge variety of trading assets (Forex, Metals, Energy, Stocks & Indices)

2. Trade Online from your desktop or mobile PC

3. Leverage your funds (50:1 to 1,000:1)

4. Keep trading positions without time limits

5. Easily Manage and Hedge your Portfolio Risk

6. CFDs can be used either for short-term speculation or long-term trading

7. Trading with Tax Efficiency (reducing tax liabilities by choosing when to realize capital gains/losses)

8. Most Forex brokers offer CFD trading nowadays, and that competition narrows the brokerage spreads and commissions paid

9. Trade via CFDs on Futures (this type of CFD contract does not involve any overnight rates and it is ideal for swing and long-term traders)

 

MT4 Trade Signals Generator

 

CFD Trading Features

  • Leveraging your Funds

CFDs are purely leveraged financial products, enabling individuals to trade global markets by paying only a small fraction of the value of the trade. Capital leverage is a great opportunity for maximizing profits but it also includes high-risk exposures. You can leverage a CFD trading position as any Forex trading position (2:1 to 1,000:1).

  • Trade Any Market Conditions (Going Long/Short)

CFDs are enabling traders to profit from any market by going long (buy) or by going short (sell). By this way, traders can hedge their portfolio from market risk. For example, if a trader holds a portfolio of $10,000 worth of Apple shares, can sell the equivalent value of $10,000 worth Apple shares through CFD trading. By this way, if Apple share falls by 2%, the loss in the trader’s portfolio would be offset by the gain in the CFD trade.

  • Pairs Trading

If a trader believes that a particular asset will over-perform compared to another asset, he may use a CFD contract to go long on the first asset and short on the second asset.

  • Overnight Financing

CFDs are traded on margin and thus if a trader holds a position overnight, this trading position will be subject to a charge. Long positions are charged interest, while short positions are paid interest. Usually, the interest charged or paid is based on London Inter-Bank Offered Rate (Libor). The interest on CFD positions is calculated on a daily basis.

  • Stop-Loss and Limit Orders

All CFD brokers offer risk management facilities such as Stop Loss and Limit Orders. A Limit order is an order that is executed at a higher price than the prevailing market price while a Stop-Loss Order is an order executed at a lower price than the prevailing market price.

  • CFDs on Futures

CFDs on Futures are contracts that do not involve any overnight rates and that particular feature makes them ideal for swing and long-term traders.

 

Example of a CFD Trading Position (Long Trade)

A CFD trader believes that the Apple share will rise in the future:

  • Apple share is currently trading at 450 – 452p
  • The trader buys 100,000 Apple shares through a CFD contract at 452p
  • The value of the contract would be $450,000 but using the margin option the trader has to pay only 10% initial margin, that means that he must deposit $45,000
  • The commission paid is $90 ($45,000 x 0.2%)

A few days after:

  • After a couple of days the Apple Share rise to 460-462p
  • The trader decides to close his position and sells 100,000 Apple shares at 460p
  • The commission charged for the selling will be $92 ($460,000 x 0.2%)

The profit made by that trade would be calculated as follows:

  • Profit = (Closing Level - Opening Level) x Size – Commissions Paid
  • That means (460p. – 452p.) x 100,000 – ($90+$92) = (8p. x 100,000) - $182
  • That means $8,000 - $182 = $7,818

But as this Trading Position has been kept opened overnight for a couple of days, interest was charged too:

  • So the Final Profit = $7,818 – Financing Charge = $7,818 - $68 = $7,750

That particular CFD trader made a profit of $7,750

 

 

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External Links: CFD Trading Resources at CFDagent.com

 

CFD Trading

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