cfd trading explained

CFD Trading Explained – What Is a CFD Trading?

A contract for difference is a sought after embodiment of derivative trading. CFD trading enables one to forecast on the rising or falling prices of fast-moving global financial markets such as shares, indices, commodities, currencies and treasuries. CFD trading gives you the capacity to carry out a trade against share price movements without actually buying or selling the physical shares. Create a free account start trading cfd’s today.

CFD Trading Examples

What determines your profit or loss is the difference between the price when you enter a trade and the price when you exit and the best way to understand how CFD works is to follow examples. It is important to note that the selling price is usually quoted on the left and the buying price on the right.

cfd trading explained

How to Trade CFDs

Below are five steps showing a brief run-down of the CFD trading;

  1. Choose the financial instrument: it is important to make a choice on the type of trade instrument you want to trade on such as EUR/USD or UK 100. There is availability of CFDs at our disposal across a wide range of global markets amongst which are forex, commodities, indices, treasuries and even shares and cryptocurrency.
  2. Choose to buy or sell: When trading, the ability to make smart and precise speculations go a long way is curbing the risk of loss, thus if you think the prices will rise go ahead and buy but if your forecasting instincts think the prices will go down the its best to sell.
  3. Enter a trade size: The value of a single CFD unit can differ depending on the instrument you’ve chosen to trade, so decide on how many units you would want to use in making a trade.
  4. Manage your risk: from the range of stop-loss orders available, guarantee stop-loss orders (GSLOs) is the most preferred because even though it works the same as the regular stop-orders it has a premium and they guarantee to close you out of a trade at the price you specify regardless of how volatile or turbulent the market gets and the premium is refunded in full if the GSLO is not triggered.
  5. Monitor your position: after a trade is made, endeavor to monitor your open positions and this includes any stop-loss orders or take-profit orders to allow you follow your real-time profit or loss. Have it at the back of your mind that your losses can exceed your deposits.
  6. Close your position: if for any reason a trade doesn’t automatically close even after a stop-loss or take-profit order is triggered, go ahead and close the trade whenever you are ready.

cfd trading explained

First Example: Buying STS Crypto plc

In this illustration, if STS Crypto plc is trading at 1799/1800p and peradventure you want to buy 1000 share CFDs (units) thinking that at that time the price will rise up and STS Crypto plc has a tier 1 margin rate of 5% which means that you only have to deposit 5% of the position’s value as position margin.

By calculation using (5% x (1000 units x 1800p buying price)) your position margin will be £900. Recall that if the price moves against you it is possible to lose more than your initial position margin of £900.

Outcome A: Profitable trade

If your prediction was correct and the price rises over the next hour to 1830/1831p and you decide to close your position by selling at 1830p which is now the new sell price. Now the price has moves 30 pence (the difference of 1830 and1800 i.e 1830 – 1800) in your favor, multiply this by the size of your position (1000 units) to calculate your profit which is £300.

Outcome B: Losing trade

Unfortunately your forecast was wrong and the price of STS Crypto plc drops over the next hour to 1749/1750p and it seems like the price will likely continue to drop, so to limit your potential loses you decide to sell at 1749p which is now the new sell price to close the position. The price has moved 51 pence (gotten from the difference between 1800 – 1749) against you, multiply this by the size of your position (1000 units) to calculate your loss which would be £510.

Take note that the margin requirements are only applicable to net open positions. To create an account and start trading cfd’s click.

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Second Example: Selling STS Crypto plc

In this illustration too, STS Crypto plc is trading at 1799/1800p and want to sell 1000 share CFDs (units) thinking that at that time the price will drop and STS Crypto plc has a tier 1 margin rate of 5% which means that you only have to deposit 5% of the position’s value as position margin.

By calculation using (5% x (1000 units x 1799p buying price)) your position margin will be £899.50. Recall that if the price moves against you it is possible to lose more than your initial position margin of £899.500.

Outcome A: Profitable trade

If your prediction was correct and the price falls over the next hour to 1749/1750p and you decide to close your position by buying at 1750p which is now the new buy price. Now the price has moves 49 pence (the difference of 1799 and1750 i.e 1799 – 1750) in your favor, multiply this by the size of your position (1000 units) to calculate your profit which is £490.

Outcome B: Losing trade

Unfortunately your forecast was wrong and the price of STS Crypto plc rises over the next hour to 1849/1850p and it seems like the price will likely continue to rise, so to limit your potential loses you decide to buy at 1850p which is now the new buy price to close the position. The price has moved 51 pence (gotten from the difference between 1850 – 1799) against you, multiply this by the size of your position (1000 units) to calculate your loss which would be £510.

To contact STS Crypto and more info click here.

Commission

CFD share trades attract a commission charge per trade. UK share trades cost 10 basis points (0.10%) with a £9 minimum commission charge per trade.

To determine how much commission you would pay, multiply your position size by the applicable commission rate.

In the STSCrypto plc example above, the charge to open a buy position would be calculated as follows:
1000 (units) x 1800 pence (price) x 0.10% = £18.00

The charge to close the buy position would be calculated as follows:
1000 (units) x 1830 pence (price) x 0.10% = £18.30

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Disclaimer

This site is owned by: Capital Letter GmbH, HRB242418, Adolf-Kolping-Straße 16, 80336 München, Germany. Risk Warning: The Cryptocurrency CFD services offered by Stscrypto are not suitable for all investors and are characterized by high risk. Before using Stscrypto services, you must ensure that you are fully aware of and understand the specific characteristics and risks regarding the Cryptocurrency CFDs. Trading on Cryptocurrency CFDs entails a high risk of losing some or all of your invested capital. You should not trade with funds that you cannot afford to lose and you should seek independent professional advice if necessary. Read Stscrypto full Risk Disclaimer.