6 steps to trading CFDs

Contracts for Difference, or CFDs, are financial instruments that let traders profit from an underlying asset’s price fluctuations without really owning it. It is essentially an agreement between a trader and a broker to swap the difference in an asset’s value between the beginning and the end of the contract.

Trading CFDs has become very popular among traders because it offers flexibility in an environment of high risk and the possibility of large returns. However, using a clearly defined handelsstrategie is often necessary for potentially succeeding in CFD trading. By offering a methodical approach to decision-making, a trading strategy lowers emotional biases and increases the likelihood of steady profitability. We’ll go over a step-by-step process in this article to help you get started.

How does CFD trading work?

Trading contracts for difference (CFDs) involves purchasing and selling financial derivatives whereby you consent to exchanging the difference between the opening and closing prices of a particular financial asset, such as an index, share, or forex pair.

You do not receive the asset in hand, in contrast to traditionele handel. The instrument you trade is never your own.

To go long on oil, for instance, you could purchase an oil CFD that gains or loses $1 for each point that the price of oil moves. Even though you won’t own any oil, you will still profit or lose money based on changes in its price.

$100 is your profit if oil increases by 100 points. You will lose $100 if it drops 100 points.

Although this is an easy way to understand, there are many other aspects of CFDs that you should be aware of, such as leverage and shorting.

Open a trading account

Purchasing and selling CFDs requires an account. You’ll use this to manage your risk, keep an eye on your profit and loss, open and close positions, and conduct research on new opportunities.

You can try things out risk-free with a demo trading account before you invest real money. The money involved is the only aspect of the price movements that isn’t real. As such, it’s an excellent practice area.

It usually takes a few minutes to open a live account when you’re ready to risk real money. After funding your account, you can then get into trading.

Choose a financial market

CFDs offer a wide variety of markets to trade in. IronFX, provides contracts on thousands of distinct markets, such as:

Aandelen

Access to thousands of worldwide aandelen on well-known companies like Tesla, Amazon, and Apple.

Aanwijzingen

Major worldwide stock Aanwijzingen, such as UK 100, NASDAQ and Germany 30 are available for trading around-the-clock.

Forex

Major pairs like EUR/USD, GBP/USD, and USD/JPY see enormous volume in forex, one of the most liquid markets in the world.

Grondstoffen

Dive deeper into natural resources and discover how Crude Oil, Coffee en Sugar.

Metal

Use a large range of precious metalen as a powerful asset class by trading CFDs on gold and silver.

Futures

Quick execution and no requotes are available when you trade coffee, natural gas, and Eurodollar.

Once a market has been selected and before placing your trade, you will be able to examine all the necessary information, view a chart, and see the current price.

Go long or short on CFDs

There are two prices on CFD markets. The buy price (the ask) is the second price, and the first is the sell price (the bid). The spread is the name given to the difference between the two.

The underlying instrument’s price serves as the basis for both. Usually, the buy price is slightly higher, and the sell price is slightly less than the market price. You will need to determine whether you wish to buy or sell before you open your position.

By trading at the buy price, you go long if you think your market will rise. You can short it by trading at the sell price if you think it will decline.

In the event that a market declines in value, you will profit and vice versa.

Set position size

You’ve selected your market and made your long- or short-term decision. However, how do you choose how big of a position to have? The number of contracts you choose to buy or sell when trading CFDs is up to you.

A specific portion of the underlying asset is represented by each contract. For instance, one CFD is equal to one share when it comes to stocks. The underlying market’s base currency is used to buy and sell CFDs. Therefore, your profit or loss will be determined in US dollars if you are trading US stocks.

Because contracts for difference use leverage, opening a position only requires a small amount of margin, also referred to as the total trade value, in your account. Generally speaking, more margin is needed the higher the trade value.

Having adequate funds in your account to pay for your margin is crucial. The amount required to open a position will be automatically determined by the trading platform’s margin calculator.

Use stop & limit orders on CFDs

Think about your risk-management plan before you execute your trade. You can add a stop loss and a take profit to your order, as you can see on the deal ticket above. Both of these are helpful resources for risk management.

A stop-loss order instructs your provider to terminate your position at a predetermined level, based on your plan. As the name implies, this will be at a lower price than the state of the market and is usually activated on losing positions to help reduce losses.

When the market hits your profit target, a take-profit order is used to automatically capture a return by instructing your broker to close your position at a better price.

Your position is now active, and as the underlying market rises and falls, so will your profit or loss.

With the various handelsplatforms or mobile apps, you can adjust, add to, or remove your position while keeping an eye on market prices and real-time profit/loss updates.

It’s not too late to add a stop or limit if you didn’t choose them before opening the position. While this is going on, you can adjust any exit orders you currently have in place to reflect the new circumstances.

In order to close a CFD, you must trade in the opposite direction from how you opened a CFD. 500 CFDs that you initially purchased are now being sold. You would purchase 30 contracts to close if you had sold 30 contracts to open.

Once your net open profit or loss has been realised, it will show up in your account cash balance right away.

Simply deduct the price at the start from the price at the end (or the opposite for short positions) to determine your profit or loss manually, then multiply the result by the size of your position. Always consider the costs.

Final thoughts

Prior to placing a CFD trade, you must comprehend how contracts for differences work. After that, you can decide how long to go and open your position by selecting the number of contracts you want. Any gains or losses will be realised when you close the position.

CFDs are advanced instruments that give you access to hundreds of instruments, the ability to use leverage, and the ability to speculate on rising or falling markets 24 hours a day. However, you must start off correctly if you want to potentially profit from CFDs’ versatility.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.