HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

What Is a CFD? Contracts For Difference Explained


CFD trading may not sound like much at first, but it opens traders up to an entire world of possibility in terms of trading assets and finance. CFD is an abbreviation for a contract for difference. It is essentially an agreement between two parties, usually, a buyer or seller, where the buyer will pay the seller the difference in value between the current asset value (also called closing price) and the asset value as the time the contract was made (also called opening price).

How Does CFD Trading Work? Contracts For Difference Explained


CFD trading works by brokers developing a popular form of derivative, taking an underlying market, and making a new trading instrument. This new trading instrument isn’t bound to the same rules of a spot trading exchange, where traders can only buy or sell an asset that they then own.

Because CFD trading relies on derivatives, new and even exotic trading instruments can be designed. CFDs can be anything but are most commonly traded as forex, stocks, stock indices, commodities, or cryptocurrencies.

CFD Trading vs. Traditional Trading: What You Need To Know


With CFDs, the underlying asset isn’t owned and no actual assets ever change hands. Only the base account asset the contract is settled in is ever impacted in any way.

Due to this design, CFD trading doesn’t rely on spot buying or selling to make a profit, and instead is called a long or short position. If a trader uses CFDs to trade a specific market and expects an asset to go up, rather than buying the asset and holding it, the trader would open a long contract at the current market value, and then settle it at a bid price they are comfortable with. Any remaining difference gets booked as profits, hence the name, contract for difference.


Advantages of CFD Trading: The Pros of Professional Trading Instruments 

Risks and Risk Management: How To Protect From Loss


Due to leverage or contract size increasing the impact of a CFD’s ability to amplify profits significantly, it also can greatly enhance losses.

Therefore, it is even more critical to employ risk management strategies and take extra caution when trading CFDs. Traders need to fully understand the contract they are entering and all it entails and also be well-versed with risk management strategies to ensure that their positions and capital are properly protected.

Risk management strategies include only wagering so much per position to establish a winning risk to reward ratio, setting stop losses, or even performing technical analysis to get a read on the market before taking an entry.

Successful risk management strategies vary, but the most successful traders never forget them and don’t stray far from their trading plan. It is also recommended to use a trading calculator to prepare each position properly and know exactly what you are about to enter for a contract.

Forgetting a stop loss using high leverage could create a risk of losing it all. It’s important to never forget this critical step. By having a stop loss in mind in advance, once it’s set, you will be less apt to make changes or panic in the moment of strong volatility. Unfortunately, due to the high risk associated with CFDs, they are not always available in the USA.

Short and Long CFD Trading Explained: Profit From Any Direction


One of the most glorious aspects of a CFD trading platform over traditional trading platforms is the ability to long and short markets rather than buy or sell.

When buying and selling, there is only the ability to profit while prices are rising. Traditional market traders sell their assets when they expect it to fall in value, then later buy it back when the price has fallen low enough again to become attractive as an investment.

With long and short positions, traders can generate profit from both rising and falling markets, and always be ready for an opportunity no matter which way the market turns next.

Short and long trades can be held simultaneously, at different prices, and with different targets. This also allows for hedge positions and other advanced trading strategies.

The win to loss rate and total profit or loss will ultimately determine if a trader is successful or not. This is why risk management strategies are especially important. Even when things don’t go your way, losses can be minimized and with the right strategy, it would take as many as 100 consecutive losses to fully drain an account.

Leverage and margin trading can enhance the risk associated with these types of trades, however.

What Are Margin and Leverage?


Margin and leverage go hand and hand, and they often get confused or are used interchangeably albeit incorrectly.

For example, a 0.01 BTC trade at 100x leverage, would result in a position size of 1 BTC. In USD terms, a $100 trade at 100x would turn into a $10,000 trade.

Leverage on CFDs ranges from 3x all the way to 1000x on more stable forex currencies. This is how traders squeeze out more profit from the normal stable market. Cryptocurrency, like Bitcoin, however, is more commonly traded at 100x due to how highly volatile the asset class is.

All CFD trading accounts will want to keep enough margin allocated to cover all trades, as well as added margin to protect from liquidation in case a trade goes in the wrong direction.

More margin is required for larger positions sizes or more positions overall. If not enough margin is held, first, a margin call will act as a warning. Then, liquidation of all open positions will occur to cover the total margin required to settle all positions. Any remaining margin will be returned to a user’s trading account balance. The reason any trader would want to utilize leverage comes down to profits. Leverage raises the stakes and makes trading high risk and high reward.

When the position is closed, the margin used as collateral to multiply the power of the trade disappears, but the profits remain. It is important to remember, though, that although the profit generated can be extreme, this also means that losses are also multiplied. This makes things like risk management strategies and strategic stop loss placement that much more important and crucial to trading plans.

How To Start Trading CFDs


Now that you can clearly see the benefits that CFD trading platforms have to offer over traditional trading platforms, here’s how to get started. In very little time and only a few steps, you can get registered on a reliable platform, make a deposit, and go from position to profit.

Step 1: Create a CFD Trading Account


Traders can sign up for a trading platform of a CFD broker that offers a free demo account before beginning to trade on a live account. PrimeXBT is an award-winning Bitcoin-based margin trading platform offering CFDs across a variety of financial markets, including forex, commodities, stock indices, and cryptocurrency assets.

Registration is simple, takes less than one minute, and offers an easy to use Bitcoin-based trading account. Your trading account balance is denominated in BTC, protected by bank-grade security and other preventive measures such as two-factor authentication and compulsory address whitelisting.

Step 2: Make Your First Deposit


PrimeXBT offers a low minimum deposit of just 0.001 BTC to get started. Funding your account is an important step and gets you even closer to diving into markets.

It is important to both be comfortable with your first deposit but ensure you deposit enough to avoid a margin call due or falling into a negative account balance. Some platforms, however, offer negative balance protection. You also need more capital depending on the amount of trade volume expected.

Also, keep in mind most CFD brokers include a commission charge on each trade, and others even include a financing or funding fee for keeping CFD positions open using collateral.

Step 3: Plan Your Trading Strategy


Coming up with a trading strategy that brings regular success is much more difficult than it sounds, however, it is possible with time, skill, practice, and expertise. Of course, luck can be a factor as well.

Performing technical analysis to establish a buy price in which to enter and sell price at which to exit is paramount to success. Once a plan is in place, it’s time to take a position.

Step 4: Take a Position


Prepare the position you want to take by entering the desired entry price. If the price is close, you may want to consider entering the trade immediately through a market order. Otherwise, choose a limit or stop order and submit your order.

When the order has filled, enter a stop loss, and then the final step is next.

Step 5: Take Profit


All that’s left, unless your stop loss is triggered before this point, is to take profit once a desired level or target is reached.

Taking profit often and even early is recommended. This way if the market turns back the other way, you close the trade in profit and not at a loss.

CFD Trading Strategies


The two most common ways to trade CFDs is through day trading or swing trading. Both techniques have their own set of pros and cons, discussed below. The same tools and risk management should go into both types of trading techniques despite the differences. These basic building blocks of trading shouldn’t change.

Day Trading CFDs


Day trading involves high frequency, short term trade durations often in the same day or trading session.

Day traders prefer the fast-paced thrill of shorter timeframes and more active trading techniques. Technical analysis indicators are the same across both day trading and swing trading, however, day traders focus more on timing, moving averages, or overbought and oversold conditions, instead of trend measuring tools.

The quick, in and out action of day trading is perfect for the speedy contract settlement of CFDs and the platforms offering them. These types of contracts are designed with speed and efficiency in mind. And by getting in and out to rates in rapid succession within the same day or trading session, day traders can avoid overnight finance fees in addition to commissions.

Swing Trading CFDs


Swing trading focuses more on medium to long timeframes such as daily and weekly timeframes. Typically trades don’t last more than a few weeks and rarely extend beyond two months unless an already open position begins to trend strongly and stops are moved down in profit accordingly.

Otherwise, swing trading takes place at medium-term trend peaks and troughs. Swing trading refers to the more common, buy low and sell high strategy form traditional markets, but medium-term long and short trades through CFDs are also possible.

Some trading platforms may charge an overnight financing or funding fee, in addition to commissions at the time trades are opened. That should be taken into consideration when planning swing trades. Therefore day trading is often considered the ideal trading technique for CFDs. However, this is not a rule and depends on many factors especially personal taste.


Bonus Tips For Trading CFDs


FAQ: Frequently Asked Questions About CFDs

What does CFD stand for?

Contracts for difference.

What is the definition of CFD?

A type of agreement or contract where two willing parties, a buyer, and a seller agree to settle the contact based on the price difference between the time the contract was opened and at the time the position was closed. Pricing is based on the market price of the underlying asset of the trading instrument.

Which CFD markets can I trade on?

CFDs are available for any type of market, from traditional to digital assets. Most commonly CFDs are found across forex, stock indices, commodities like gold and silver, and cryptocurrencies like Bitcoin and Ethereum.

Is CFD trading right for me?

CFD trading is right for anyone, so long as a trading calculator is used so traders fully understand all aspects of their position, including potential profit, the risk to reward, any loss if a stop loss is triggered, and more. Never take position sizes larger than you can stand to risk or lose, and be sure to stick to the trading plan at all times.

Is CFD online trading safe?

Yes, depending on the trading platform selected. PrimeXBT utilizes many safety features that protect user funds and keep accounts secure.

What is CFD leverage trading?

Leverage trading uses margin to use as collateral when taking position sizes much larger than the capital would otherwise normally allow for. This lets traders gear their trades and greatly amplify any profits generated from each position. This also will increase risk so prepare accordingly.

What is trading long and short?

Long and short lets traders profit whichever way markets turn. Long and short positions are just one of the most important benefits of CFD trading.

How do I use CFDs for hedging?

CFD hedging involves opening a short position in an asset that is also a long term hold as an investment. For example, a trader holds Bitcoin, and both fear a crash is coming but don’t yet want to set until there’s more confirmation a trend change is underway. At the first sign of reversal, a trader can open a hedge short position, and profit from any drawdown before they make up their mind as to what to do with their long term investment holding. It is a great way to protect and even grow capital in the short term during crashes or downtrends.

What is PrimeXBT?

PrimeXBT is an award-winning Bitcoin based margin trading platform offering CFDs across forex, stock indices, commodities, and cryptocurrencies. Forex includes all major currency pairs. Stock indices include the Dow, S&P 500, FTSE, Nikkei, and many more. Commodities include oil and gas. Cryptocurrencies include Bitcoin, Ethereum, EOS, Ripple and Litecoin. Gold and silver are also offered. The large variety of assets on one platform make it ideal for traders seeking to diversify their portfolio or find more opportunity in general. 

Should I sign up for PrimeXBT?

If you are interested in CFD trading, the low minimum deposit and customizable, easy to use platform is perfect for novices and professionals alike. Anyone is welcome to register for a free account.

How do I sign up for PrimeXBT?

To sign up for PrimeXBT, visit primexbt.com/register and follow the simple steps to get set up. After that make your first deposit, fund your account,and you will be ready to start trading CFDs right away.

#source


RELATED

Unlocking the Power of Fibonacci Retracement: A Beginner's Guide

Trading with Fibonacci retracement might sound daunting, but it's a remarkably valuable tool once you grasp its fundamentals. Let's delve into the key concepts and step-by-step guidance...

Real Forex Trading: Find Out What All the Fuss is About

The market for trading forex or foreign currencies is known as foreign exchange trading, or forex trading or FX. The largest market in the world, forex, and what happens in it, influence real, everyday life...

Mastering the Art of Automated Trading: A Comprehensive Guide to Trading Robots

In the digital age, trading robots have revolutionized the financial markets, providing traders with a high-tech assistant to navigate the complex world of trading...

Financial Instruments Explained: Types And Asset Classes

Every beginning investor, having defined his investment objectives and risk profile, thinks about how to structure his portfolio so that it meets his needs...

Litecoin Trading: A Brief Guide for Beginners

Litecoin (LTC) is one of the oldest and most popular cryptos on the market. It is often called "digital silver to Bitcoin’s gold", and for good reason. On the technical side, both cryptos...

The Discipline of Setting your Stop-Loss Order

Are you wondering how you can more easily manage and monitor your trades? This article will show you the benefits of setting stop-losses in your daily trades!

All that glitters ain't gold

Amid all the commotion in the equities and cryptocurrency markets, the yellow metal has looked somewhat neglected of late. At the height of the coronavirus crisis, gold was...

What is a stablecoin?

Stablecoins play a significant role in the global cryptocurrency markets, providing a range of use cases for traders, investors, and active crypto users...

Choosing a trading instrument: how to trade currency pairs

Early on the path to becoming a trader, every beginner must determine what to trade and how. This choice should be made based on the desired goals...

How to trade stocks with maximum outcome

Investing in stocks is an attractive way to become part of the world's best-known companies. However, not every investor knows how to trade stocks efficiently...

Common Trading Mistakes Every Trader Should Avoid

Trading in financial markets can be both exhilarating and profitable, but it's essential to navigate this world with caution and discipline. Many traders, especially beginners, often fall into common pitfalls...

How to control your emotions while trading

Controlling one’s emotions while trading requires practice and mindfulness which means forex trading psychology. This presents a unique challenge for all traders when...

What Is the OTC Market?

Over-The-Counter markets are popular among investors and traders. This term is mostly associated with the trading of company shares. Yet, it's possible...

What is a central bank?

A central bank is a financial institution that manages the monetary policy and currency supply of a country or group of countries. It is typically responsible for maintaining...

Top Forex Trading Tips For Beginners

Want to know the best trading tips today to use to your advantage in the Forex market? This article will break down good trading tips you should consider using...

How to Effectively Assess Your Forex Trading Performance

In the fast-paced world of Forex trading, constant growth and adaptation are essential. This not only demands a thorough understanding of the market dynamics but also necessitates regular assessment of one's trading performance...

Understanding Signal Providers and Forex Trading Signals

In the vast realm of forex trading, a 'signal' serves as a beacon, pointing traders towards potentially profitable trade opportunities. A signal provider is akin to a lighthouse keeper...

How to Trade the Fed Rate Decision - Guide for 2022

The Fed funds rate is one of the most important benchmarks for investors and traders all over the world. Its adjustment significantly affects exchange rates and the economic situation of countries...

A Guide to Foreign Exchange Trading

Foreign exchange trading (also known as forex or FX trading) involves the speculation on currency prices exchanging on a global marketplace (the forex market)...

How to stop qwertying your way to hackers: 5 internet security tips from OctaFX

Who will you blame if you wake up one day without a job and with no money on your bank card? Yourself. That is if you don't follow internet security tips. The global broker OctaFX outlines the main do's and dont's of staying safe online.

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.