CFD trading has become a top-rated service offered by brokers in the financial market today. This technique allows the trader to profit from the market movement. Whether the market is set to go up (bullish) or down (bearish), the trader can profit by trading a given financial instrument as CFD. To this end, CFDs are regarded as derivative trading as they derive their value from the price difference between the trader's entry and exit position in the market. The majority of the crossed pairs are traded as CFDs in today's forex market.
What is CFD Trading?
CFD is an acronym for Contract for Difference. The prime word contract suggests that the trader enters into a sealed agreement with the broker to deliver to him as returns, the price difference in the pairs purchased from his entry point till the exit position. This means the trader can take either position and make profits if the market goes in his selected direction. Trading CFDs often involves leveraged trading, allowing traders to take large positions with big lot size while placing orders in the market.
One essential feature to note about CFD trading is that; there is no legal ownership of the assets purchased in the market. The trader has only a legal claim to their price difference from his entry to exit position, which could come to him either as profit or loss.
The profits or losses made by the trader for any position taken in CFD trading are usually calculated by checking the total market movement between his entry and exit points and multiplying it by the total number of units purchased by the trader (Also known as lot size).
What pairs can be traded today as CFD?
Virtually all crossed pairs can be traded as CFD today in the market. The following is a list of financial instruments traded as CFD today:
- Forex: This includes all foreign currency pairs such as EURUSD, GBPUSD, EURJPY, AUDCAD, etc.
- Commodities: Highly volatile products such as XAUUSD, XAGUSD, USOIL, UKOIL, etc are easily traded as CFD today.
- Cryptos: Most cryptocurrency pairs are offered as CFDs in the market today such as BTCUSD, ETHUSD, XRPUSD, LITUSD, etc.
- Stocks: It is possible to trade any stock today as CFDs without owning it as a real asset. Hence we have CFD stocks available such as Facebook, Google, Twitter, Amazon, Zoom, Coca-cola, Apple, Microsoft, Tesla, etc.
- Indices: Almost all indices are traded today as CFDs. Here we have Nasdaq 100, US 30, CN50, JP 225, AU 200, FR 40, etc.
What are the advantages of CFD trading?
CFD trading has become so popular today and overtaking traditional spot trading due to the many advantages it has over the former. The following are the advantages of trading CFDs today:
- Leverage Trading: The significant advantage of CFD trading over spot trading is the wide range of leverage provided by the broker for taking any position in the market. Often ATFX provides good leverages up to 1:500 for taking any position in the market under CFD trading. Leveraged trading offers the trader an opportunity to bargain more than his investment capital in today's forex market. Thus, a micro account could attempt half the lot size due to a mini account with the leverage provided.
- Low Spreads: ECN broker such as ATFX allows a very low spread for trading CFD, which is not found with any other broker. This enables the trader to maximize his gains from trading CFDs.
- Hedging: CFD trading allows the trader to guard against loss by hedging his position in the market. Often hedging entails taking two different positions simultaneously at the market as a precaution against sudden pullbacks and changes in market trends. With CFD trading, the trader can easily place buy and sell orders simultaneously or as pending orders to safeguard his capital from excessive loss.
- A portable form of trading: CFD trading offers maximum flexibility in trading as the trader does not need to purchase the physical asset in the case of commodities such as USOIL, GOLD, Silver, Brent, and Gas. With CFD trading, only the digital version of these assets are bargained and there is no question of carrying them around as heavyweight items. Trading CFD makes it possible to rather profit from the price movement of these financial instruments without purchasing the physical asset.
- Fast Execution: ECN brokers such as ATFX are renowned for the fast execution of all orders placed at the market as CFDs. This is because ECNs are direct order executors buying and selling into the large pool of liquidity provided by commercial banks for trading the Forex market today. Almost all CFD orders placed at the market today are executed within an instant.
- Multiple Positions: Another major advantage of CFD trading is that it allows the trader to enter multiple positions for a given pair. Thus a trade may spot an opportunity in the market and decide to take double or triple positions for the same currency pairs.
- Diversification of funds: CFD trading enables the trader to diversify his investments into various financial instruments without depending on one alone. Diversification of funds helps to reduce the trader's risk to the nearest minimum.
- Splitting of assets into units: CFD trading allows the trader to buy micro-units of high-cost financial instruments such as metal and Bitcoin. Smaller units of various financial instruments can be purchased with ease through CFD trading.
What are the disadvantages of CFD trading?
Forex Trading no doubt involves risk and so does CFD trading too. However, many experts believe that the most significant risk of forex trading comes from CFD trading. Hence, we have decided to highlight some of the risks associated with CFD trading in this work.
- The loss could exceed one's capital: There have been several cases of people taking excessive risks in CFD trading through over-leveraging, leading to the loss of their entire investment. The forex market is very volatile and often could move for a long time in an opposite direction before retracing. To guard against excessive loss, traders are advised to use proper stop loss and take profit targets.
- No legal ownership of assets: Of course as hinted earlier, the major difference between CFD trading and spot trading is that there are no legal claims to assets purchased as CFDs. This is quite unlike spot trading where the buyer owns the real assets and can only profit from the assets based on the extra price value it adds from the time of purchase.
- It is speculative trading: The forex market is very speculative. None is sure of the next market movement. Investors often rely on fundamental and technical analysis to point out the best position.
- It comes with a great deal of tension and stress: The fact that the next market movement is uncertain but based on intelligent guessing fills the trader's heart with great tension and worries. No trader is happy losing a dime to the market. Hence the need to be more careful in entering a position in the market today.
What is the difference between CFD and spot trading
There are three major differences major between CFDs and spot trading. These differences are stated below:
- Ownership of Assets: Today, there is no legal ownership for all the financial instruments traded as CFDs in the forex market. The trader can only claim the derivative price value from his entry and exit points. This is quite different from Spot trading, where a given quantity of assets is bought and added to the trader's portfolio. In which case, he has legal ownership of the digital asset purchased. The asset's market price at each point in time determines its profits or loss.
- Leverage: CFDs trading allows the trader to leverage his positions to maximize profits. However, there is no leverage possible for spot trading.
- Profit from buying and selling: CFD trading is very significant today as it allows the trader to profit from the market movement in either direction, say up or down (Buy or sell). This is hardly the case for spot trading, in which case the investor only profits from the increase in asset value from his entry price. His profits or loss depends on the asset's value at the point he decides to sell off.
What are the various platforms for trading CFDs?
CFDs are available for trading today on the MT4 and MT5 trading platforms. The total number of CFDs offered by a broker is displayed on these two platforms for the trader to make his choice.
How to trade CFD
Trading CFD is a lot easier than other forms of trading. It requires a proper understanding of the market structure to make the correct prediction to buy or sell. We have therefore provided a step-by-step guide in this work on how to trade CFD:
- Choose a reliable ECN broker
Choosing a reliable broker is necessary for trading CFD today to ensure securities of funds and direct order execution without trade manipulation. ATFX is renowned today as an award-winning broker most suitable for CFD trading.
- Sign up an account with the broker
The next step after taking the wise decision to trade CFD with ATFX is to proceed to sign up for an account with ATFX. Signing up an account with the broker gives one access to the financial instruments offered by the broker for trading as CFDs in the market today.
- Fund your account with the broker
After one has successfully created an account for trading and passed the identity verification process, the next step is to fund one's account with at least $100 minimum for trading. ATFX has provided multiple options for funding to make it easy for the trader to fund his account instantly through bank wire, Neteller, Skrill, and Crypto.
- Choose your trading platform
There are two popular trading platforms today for the trader to select from such as MT4 and MT5. However, the MT4 is easier to use with much simplicity for beginners. The latter is best for advanced traders.
- Select your favorite financial instruments to trade
Of course, as hinted at the beginning of this work, ATFX provides a wide number of financial instruments for trading as CFDs. These options include Forex, Commodities, Metals, Stocks, Indices, and Cryptos.
- Enter a position
Another important step to take after one has decided which set of financial instruments to trade is the position to take. Here one has to decide whether to go long or short. This is a very important decision and must not be taken in haste without proper thought and understanding of the market trend.
- Set your profit target and Stop-loss
After one has taken a position in the market for a given CFD, the final step is to attach a take-profit target to it. Previous resistance points are often used to calculate the set profit target for new positions. Similarly, it is advisable to set a stop loss for each position taken to guard against excessive loss should the market go against the trader.
CFD trading, as we have exposed so far in this work, has a lot of benefits for the trader. However, it is undeniable that it has its risks too. To help the trader minimize his risk and maximize profits while trading CFDs, ATFX has provided many trading tools to make trading easy for the trader, such as MT4 indicators and rich educational materials. Similarly, ATFX has provided well-structured copy trade services for traders who would like to profit from CFD trading but cannot trade themselves either due to fear, lack of knowledge, or preoccupied with work.