CFD trading tips and tricks. Learn to become a master today

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What is CFD trading?

A CFD stands for contract for difference. CFD trading allows you to take a position on the price of an instrument without actually owning the underlying asset. One of the most unique aspects of CFDs is that they enable you to profit from falling markets as well as rising ones.

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In this article, you’ll learn:

  • What CFDs are and the benefits and risks of trading them
  • What leverage is and how to use it in practice
  • What makes CFDs so popular

The term CFD stands for contracts for difference.

A contract for difference creates, as its name suggests, a contract between two parties on the movement of an asset price.

There are several key features of CFDs that make them a unique and exciting product:

  • CFDs are a derivatives product
  • CFDs are leveraged
  • You can profit and incur losses from both rising and falling prices
  • We offer contracts for differences on over 1500 global markets, including indices, shares, currencies, commodities, and ETFs

CFDs are a derivatives product

This means that you don’t actually own the underlying asset – you’re simply speculating on whether the price will rise or fall.

Let’s take stock investing as an example. You’d like to purchase 10,000 shares of Barclays and its share price is 280p, which means that the total investment would cost you £28,000 – not including the commission or other fees your broker would charge for the transaction. In exchange for this, you receive a stock certificate, legal documentation that certifies ownership of shares. In other words, you have something physical to hold in your hands until you decide to sell them, preferably for a profit.

With CFDs however, you don’t own those Barclays shares. You’re simply speculating, and potentially profiting, from the same movements in share price.

CFDs are leveraged

This means you gain a much larger market exposure for a relatively small initial deposit. In other words, your return on your investment is significantly larger than in other forms of trading.

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Let’s go back to the Barclays example. Those 10,000 shares of Barclays are at 280p, costing you £28,000 and not including any additional fees or commissions.

With CFD trading however, you only need a small percentage of the total trade value to open the position and maintain the same level of exposure. Let’s suppose that XTB gives you 10:1 (or 10%) leverage on Barclays shares, so you would only need to deposit an initial £2,800 to trade the same amount.

If Barclays shares rise 10% to 308p, the value of the position is now £30,800. So with an initial deposit of just £2,800, this CFD trade has made a profit of £2,800. That’s a 100% return on your investment, compared to just a 10% return if the shares were bought physically.

The important thing to remember about leverage, however, is that while it can magnify your profits, your losses are also magnified in the same way. So if prices move against you, you may be closed out of your position by a margin call or have to top up your funds to keep it open – so it’s important to understand how to manage your risk.

If Barclays shares declines 10% to 252p, the value of the position is now £25,200. So with an initial deposit of just £2,800, this CFD trade has made a loss of £2,800. That’s a -100% return on your investment, compared to just a -10% return if the shares were bought physically.

What markets can you trade CFDs on?

We offer contracts for difference on over 1500 global markets and multiple asset classes, all with the ability to utilise leverage and go both long or short including:

You can profit from both rising and falling prices

If you believe the price of an asset is going to rise, you go long or ‘buy’ and you’ll profit from every increase in price.

If you believe the price of an asset is going to fall, you go short or ‘sell’ and you’ll profit from every fall in price. Of course, if the markets don’t move in the direction you expect, you’ll suffer a loss.

So, if you believe for example that Apple’s share price will fall in value, you simply go short on Apple share CFDs and your profits will rise in line with any fall in price below your opening level. However, should Apple’s share price actually rise, you would suffer a loss for every rise in price. How much you profit or lose will depend on your position size (lot size) and the size of the market price movement.

The ability to go long or short along with the fact that CFDs are a leveraged product makes it one of the most flexible and popular ways of trading short term movement in financial markets today.

Forex and CFD trading best practices: An introduction

Updated: 04 March 2020

Nigel has been in the regulated financial services industry for nearly a decade, has previously owned a financial brokerage and has written many times for sites relating to personal finance and trading.

Trading in forex and CFDs involves potentially bigger profits than normal stock trading, but there is also a much greater level of risk. Higher risk comes with the territory in any form of leveraged trading. Here are some trading tips for minimizing your losses.

Live for leverage and know what it involves

Because you don’t need to own anything fully in the way you need to own shares when trading in CFDs, you are using leverage. You are putting down a reduced sum of money and essentially betting that a future outcome will go a particular way. For every point it goes your way, you win big – but the same is true for every point it goes against you. One of the most fundamental factors to get right, therefore, is to always consider your leveraging carefully according to your account volume.

Master market assessment

When it comes to being able to study and gauge the market, the best thing to do is make a meal of it – enjoy it, savor all the courses, and dig in for dessert. If you don’t relish doing this, convince yourself you do as it will be critical to your success. In forex and CFD trading in particular, your profit depends on market movement and how well you anticipate it. Critical to mastering the market is always being familiar with central bank decisions and monetary policies in the areas in which you are trading, especially when dealing with forex. Putting mechanisms such as stop losses in place is essential, provided you don’t factor it in too narrowly.

Use stop losses to help when the market is volatile

Setting up automated stop mechanisms, such as stop losses, to close your trading order is always wise, and it can even be critical in volatile markets. It can’t help you circumvent loss completely, but it can alert you to a tricky position and minimize your losses.

Watch out for market gaps

These show up on trade charts as huge leaps in price. They usually occur when the market is closed, but the market can also open to highly unexpected news, causing the same effect. Even automated mechanisms such as the stop loss will only close orders during the next quote after the jump – they can’t kick in mid-leap.

Understand what to factor in when setting your stop loss

We’ve spoken about a stop loss not being able to kick in during a market gap and the pitfalls of it being set within parameters that are too fine. Setting the right stop loss limit can be tricky, but these are the questions you could ask:

  • What is the goal price, and when do I expect to get there?
  • What is the time frame for the trade? Usually, the longer you’re in a position, the more volatile trading is.
  • How big is my account and current balance, and what loss can I absorb?
  • Does the scale of my order size match my account balance, time frame, account size and current market situation?
  • What is the overall market sentiment, and how will this influence where I set the loss mechanism?

Know that your order size has an impact on profit

Even so-called trading gurus do not make profits with every single trade. It is reasonable to expect five to eight profitable forex trades out of 10. This means you must calculate your order sizes based on whether you have sufficient capital to outlast market movements.

Factor in the unexpected

Always be aware that the unexpected can happen because of external factors. These can range from weak internet connections and power outages to urgent errands popping up in your day that make it impossible for you to trade.

These are some introductory tips and tricks you must have in your forex and CFD armory, but there are many more intermediate ones you also need to know about, such as the Fibonacci Theory. Without a good grasp of the basics, you are doomed. Understanding leverage is key, as is the comfort of knowing you’ve put the correct stop loss mechanisms in place.

CFD trading tips and tricks. Learn to become a master today

© 2020 Titan FX Limited
Company Number 40313

Risk Warning: Trading Forex and Derivatives carries a high level of risk to your capital and you should only trade with money you can afford to lose. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary. A Financial Services Guide (FSG) and Product Disclosure Statements (PDS) for these products is available from Titan FX Limited (previously named TI Securities Limited) to download from this website or hard copies may be obtained by contacting the Titan FX Limited office. The FSG and PDS should be considered before deciding to enter into any transactions with Titan FX Limited. Titan FX Limited is incorporated in Vanuatu, company number 40313, and is regulated by the Vanuatu Financial Services Commission. The PDS available on this website does not constitute an offer to any person of any interests to whom it would not be lawful to make such an offer. United States, New Zealand or Vanuatu residents are welcome to browse our website but please note due to regulatory limitations we are unable to accept any United States, New Zealand or Vanuatu resident as a client. The information on this website is not directed to residents of any country where FX and/or CFDs trading is restricted or prohibited by local laws or regulations.

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