What is CFD Trading?
CFD trading is the activity of trading contracts for difference with a broker. CFDs (Contract for difference) are derivative products in which you can trade on the difference between a certain asset’s set starting value and its closing value. By using a contract for difference, which is basically just a contract between a buyer and seller that specifies a certain purchase price and allows for profits or losses based on the change in the price of the underlying asset during a specified time frame, a trader can participate in a financial market with a smaller initial investment.
Since their introduction in the early 1990s, CFDs have become increasingly popular as investors appreciate the lower capital requirements. They allow investors to participate in markets they may not have had access to previously because of large margin requirements or regulatory issues. CFD trading gives traders the ability to go long or short on an asset, , and in the U.K.,traders can avoid the stamp duty since CFDs are derivative products.
When trading CFDs you predict your chosen asset’s movement in the market. As you do in traditional trading, you Buy when your prediction is a rise in value and Sell when your prediction is a fall in value. This does not mean you are buying or selling the asset because when investing in CFDs you are investing in your right to earn from the asset’s movement not the asset itself. However, it is important to remember that you can lose your investments should the asset price move in the opposite direction from your prediction.
You’ve read a report on Apple that indicates the stock will plummet in the next few days. You then enter our trading platform and watch its behaviour on our live, real-time graph and decide you agree.
Do you Buy? Or Sell?
To Buy would mean the stock needs to go up higher than the Buy price.
To Sell would mean the stock needs to fall lower than the Sell price.
Has your asset risen by 2 pips beyond the predetermined criteria, or 1? If you predict a sharp change in the asset’s movement during the trade’s time frame, then trading a CFD might be your better option. However, there are risks involved, and the potential losses should also be examined.
How is it done?
We at ProperTrade have created a user friendly platform that makes CFD trading accessible and convenient, just follow the screen from left to right:
Remember the stakes
Enter trading platform
Choose CFD from the upper toolbar
Choose the CFD you want to trade on the leftmost column on the screen. You can use the filter to control what CFDs you see: All, Indices, Forex, Stock or Commodities.
Choose the direction you wish to invest in. The numbers within the Buy/Sell buttons represent the points needed to be passed for a successful trade. i.e. if the number in Buy is 1.1158, then your trade must be higher than 1.1158 when the trade closes to be considered a successful trade, if the trade closes lower than 1.1158 then your trade is not successful.
Choose when you wish to place the trade. To the right of the Buy/Sell column you will find the Trade/Order box. If you wish the trade to commence immediately, choose trade. If you wish for certain events to transpire for a trade to be made, and you don’t wish to physically wait for them to occur, then choose order and insert the criteria needed to be met for your trade to take place.
The graph on the right shows the asset’s movement. When in the green, its value is “In the money.” If it’s red, its value is “Out of the money.”
Strategies for CFDs
When you get started trading CFDs there are a few basic strategies you want to follow to make the most of your trading experience. It’s true that trading the markets can be complicated and will seem incredibly difficult at first, but by following three strategies you can soon get up to speed and hopefully improve your trading success.
These three simple strategies are below:
Focus on a small number of markets. With so many different markets available to trade with CFDs you might be tempted to try them all. This often process to be a recipe for disaster. Instead put your focus on no more than three markets initially and you’ll be able to improve more quickly. If you focus on a small number of markets you will have time to research each of the markets in depth each day. You’ll be able to place small trades in at least one and perhaps all each day as well. And with each passing day and each new trade you’ll learn more about what makes that market tick. You’ll see what the normal volumes are, you’ll find out if the market moves more at certain times of the day, and you’ll learn which economic reports are likely to move the markets. This is the best strategy if you want to become an expert in any given market.
Decide what timeframe is best for you. Some traders love the excitement that comes from trading very short time frames, but others can’t stand the stress of making split second decisions, and prefer to trade longer time frames. Decide when you begin trading if you’ll be a long term trader who focuses on weekly and monthly time frames, or a short term trader who focuses on daily, or even moves that can occur in minutes. By utilizing this strategy you’ll be a more relaxed trader and a more confident trader as you follow your own personality traits rather than trying to fight your natural tendencies.
Have a trading plan. It’s critically important that you don’t just jump into the markets without a plan. Before placing any trade you should have already completed your daily research and know whether you want to go long or short, why you’re planning on going long or short, where you’ll enter and exit your trade, and how much capital you’ll risk on each trade. By having all of this decided in advance you can avoid putting your capital at greater risk than you’re willing to accept. You are also more likely to avoid mistakes that many traders make when they trade without a plan, most notably those related to greed and fear.
These three basic strategies are not only enough to get you started in trading CFDs, they will also serve you well for your entire trading career. Always keep them in mind and if you stray from them focus on getting back to the basic strategies.
CFD – Gloassary
Here we have compiled a list of commonly used terms in Forex and CFD of Forex trading
Leverage increases your purchasing power hence enables you to gain a large exposure to a financial market while only tying up a relatively small amount of your capital.
CFDs are leveraged, which means you only have to put down a small deposit for much larger exposure.
Leverage increases your profit potential and the risk of losing your capital.
ProperTrade CFDs have a static leverage that depends on the Asset you’re trading.
When trading CFDs on leverage, you must maintain a certain level of funds in your account (the necessary margin), also known as a good faith deposit. Calculating and understanding your necessary margin requirements beforehand allows you to apply good risk management and avoid any unnecessary margin calls resulting in the closing of a position due to not enough margin in your account.
The margin of ProperTrade CFDs will be the invested amount you select prior to opening the position.
Margin Call refers to the situation where the broker ask for additional funds to cover losses from your lose making positions. Failure to meet margin calls will lead to automatic closing of your positions.
There are no margin calls when trading CFDs with ProperTrade but your position will automatically be closed when price reached the stop loss level.
Is Leveraged Trading Risky?
Even though you only put up a relatively small amount of capital to open a position (initial margin), your profit or loss is based on the full value of the position (Invested Amount * Leverage). So the amount you gain or lose might seem very high in relation to the sum you’ve invested. However, it should always be kept in mind that leverage not only magnifies your potential profits but also your potential losses. Additional information about the maximum loss or gain from each position can be found below.
Trading Profit and Loss Calculation:
Pip value: is an important component of the P&L calculation and will be given to you by the platform prior to opening your position.
Pip value for Forex (other than JPY) = (invested amount * Leverage) / open price / 10,000
Pip value for Forex where JPY is the quoted currency = (invested amount * Leverage) / open price / 10,000
Pip value for Equities and Commodities = (invested amount * Leverage) / open price / 100
Note that the pip value given by the platform is the base currency of your account.
Profit and Loss Formula = (pips movement * pip value) – swap charges
You can set pending/future orders for entering into a position when the actual price will reach your target/set price.
Buy Limit: an order to buy at a specific price that is lower than the current one.
Sell Limit: an order to sell at a specific price that is higher than the current one.
Note that there are restrictions of how close your pending order price could be from the current price
Take profit: is a pending order at a predetermined price to exit a profit making position.
You can set or change your take profit price (or amount) at the start or/and during the period of your position.
We recommend to check the take profit price prior to opening a position.
Note that there is a limit on the range between the open price and the take profit price.
You open a SELL position on EURUSD at 1.1208 with an invested amount of 100 EUR.
The pip value will be 3.5688 EUR and the take profit will automatically be set at 1.118 so if the price reached the take profit you will win 100 EUR (3.5688 * 28pips ≈ 100 EUR).
If you wish to decrease the take profit level further at 1.11 then the potential gain of your position will increase to (3.5688 * 108) 385.4 EUR.
Stop loss: is a pending order at a predetermined price to exit a loss making position.
You can set or change your take stop loss price (or amount) at the start or/and during the period of your position.
We recommend to check the stop loss price prior to opening a position.
If you change the initial stop loss level your invested amount (margin) will change also but the pip value will remain the same.
Note that there is a limit on the range between the open price and the stop loss price.
You open a SELL position on EURUSD at 1.1208 with an invested amount of 100 EUR.
The pip value will be 3.5688 EUR and the stop loss will automatically be set at 1.1236 so if the price reached the stop loss you will only lose your invested amount (3.5688 * 28pips ≈ 100 EUR).
If you wish to increase the stop loss further at 1.1250 then the risk of your position will increase to (3.5688 * 42) 150 EUR meaning that your invested amount (margin) will automatically go to 150 EUR.
Close Manually: you can close your open positions manually by pressing the close button at the right side of your open trades section.
Spread is the difference between the bid (sell) and ask (buy) price. The difference is presented in pips and reflects the cost of opening a position.
The related cost will be spread * pip value.
Swap is the interest deducted from the Profit/Loss of your position and is only charged when a position is held open overnight.
Swap charge formula: Invested amount * Leverage * swap rate / 365days.