Contracts For Difference (CFD) trading has become really popular all over the world. This financial derivative allows its traders to take advantage of the market prices, no matter if it goes up or down. You can also take long or short positions. If you think that the prices will go up, you might want to take long positions. But if you think that the contrary will happen, you should take the short positions and exit your trades before the prices go against you.
There are four important things that you need to understand about CFD before you actually start to trade.
1. Spread and Commission
When trading CFD, there are things like “sell price” and “buy price”. This buy price is also called the offer price which refers to the price upon opening a long CFD. The selling price, on the other hand, is also known as bid price which refers to the price upon opening a short CFD.
To gain profit, the price of the current market must be lower than the selling price. As for the selling price, it must be higher than the current market price. The difference between the opening and closing price is called “spread”. This spread is the cost you will be paying for entering a transaction.
2. Duration
If you want to enter a trade in the opposite direction, you need to close the other trades first. Most CFDs also do not have a fixed expiry.
3. Deal Size
With every CFD you enter, it represents a particular number or volume of its underlying asset. As for commodities, it is represented as weight and for shares, it represents the number of shares that the trader has.
4. Profit and Loss
You must know how to calculate your profit or loss before you enter a trade. There is a very simple formula that you must try on your CFD Transaction – the number of contracts must be multiplied by the value of every contract you have. After that, the difference should be multiplied to the opening and closing price.
Fees and Other Similar Charges
You may want to control the costs of every transaction you make. Therefore, you need to know the charges that your trade accompanies. You may think that the charges you pay for every trade you make are not that much. However, if you add the fees you incurred in a matter of weeks or even months, you will be shocked to know its substantial sum.
So, if you want to avoid getting surprised by the charges you pay, you should compare first the charges to be a pain in several CFD trading platforms.
Risk Management
The market will not move on your favor all the time. There will come a time wherein you can gain significant profit while there will be a time when your trades will disappoint you. During these times, you must be prepared and apply for a stop-loss order. This strategy manages when a buyer should “buy” or “sell” a trade.
