What is CFD Trading?
CFDs are leveraged products and trades on these can magnify profits, as they can equally magnify losses, excluding transaction costs including spread and interest on overnight holdings may apply. CFDs are Contracts for Difference applying to the price movement of an underlying financial instrument. No ownership or rights to the underlying is available when trading CFDs.Register Now
How Does CFD Trading Work?
New and unfamiliar traders often ask themselves what is CFD trading, and how does it work? And the answer, while a little technical, is quite simple really: as an investor or trader, you can open a position on a certain asset, no matter its current price point, for example, Gold at $1735.50.Margin is the minimum amount of money required to open a leveraged trading position.
A trader will require additional money in their account to cover the difference in the prices after the position’s opening price. Other transaction costs including spread, overnight holding fees, dividends payable if applicable may apply, all of which required deposited funds, or margin, to cash cover.
Margin can also be described as the difference between the face value of your position and the funds being lent to you by a broker or leverage provider.
The initial margin is the deposit required to open the position, often called the deposit margin or just the deposit.
At that point, your broker will offer you two options – you can either back the asset (meaning you believe it will go higher by the end of the selected period) or short it (meaning you believe it will drop in value). Let’s say you’ve opened a position on a Gold CFD to increase in value.
When you close the position, you either lose on the position if the asset decreases in value, or you win on the position if it increases beyond the spread.
Trade360 is an issuer and makes money on the other side of the trade.
Analysing Popular CFD Markets
Because CFD markets come in many shapes and sizes and often vary from broker to broker, some brokers offer a multitude of stocks while others focus on currency pairings and others still can run the entire gamut from Adidas stock to the Yuan-AUD pairing. CFD indicators need to be just as versatile in their ability to estimate outcomes.
To that end, indicators come in many forms, with each focusing on a slightly different method of taking in past results and laying out a possible pattern for the future.
The moving average can be used to identify price trend directions.
The MACD takes two moving averages and compares one with the other with a divergence signalling a slowing down in the market while a convergence likely means the same market is preparing to reverse.
Bollinger Bands are most useful when assets trade outside normal levels. The tighter the two bands are, the lower the volatility for the asset in question.
These are just a few of the popular Indicators one can use when trading CFDs; there are many more, each with a specific purpose and an area in which it functions optimally.