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Finances & Money

How to Trade CFDS And Benefit of Using It

April 14, 2020
By Susan Paige
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It is important to understand that when trading CFDs you do not buy or sell the underlying asset. By trading CFDs you are assuming a position on the future direction in which the price of said asset will move:

If, on the contrary, you think that the price of the underlying asset will move downwards, then you will open a “short” position, selling CFDs and you will make a profit proportional to the depreciation of the price of the asset. If the price moves against the position taken, a loss proportional to the price variation will be obtained in the same way.

In summary, what will determine the profit or loss when closing a transaction with CFDs on the stock market will always be the size of the variation (up or down) in the price of the underlying asset?

On the other hand this is a fundamental aspect, since CFDs will be more profitable (and will also have more risk) the greater the volatility of the market on which it is operating.

What are CFDs vs. Futures?

A typical decision for traders is to decide between using CFDs or Futures. The truth is that, although futures do not have such a large capital requirement at the beginning, they can carry much higher expenses in the long term. For medium-low investors, CFDs remain the best option.

Trading platforms to trade CFDs

Below are some popular platforms for the usages of CFD Trader:

  • AvaTrade offers you a wide offer of exclusive and intuitive trading platforms, which facilitate the operation, management and analysis of your trading operations with CFDs.
  • MetaTrader 4: Discover the best choice for FX and CFD trading on one screen.
  • AvaOptions: Enjoy our new online Forex Options platform and maximize your trading strategies.
  • Automated Trading: Copy trades from expert traders through the best automated trading platforms like Zulu Trade.
  • Mac Trading: Invest in currencies from your Mac computer with the best professional graphical and analytical tools to achieve superior benefits, learn more about mac metatrader.
  • Mobile trading: Download our MetaTrader 4 app for free and trade from anywhere through your AvaTrade account.

Advantages for CFDs traders

  • It can be operated both long and short. We can take advantage of both the ups and downs.
  • A multitude of underlying assets that allow us to have a wide range of opportunities. Products from various countries in a wide variety of currencies that improve the diversification of our portfolio.
  • They have leverage. With a few small guarantees, we can move a larger nominal. This gives us the possibility of obtaining good returns with small market movements. In other words, they give us access to intraday trading.
  • It only moves based on an underlying. There are no other variables that determine its oscillations. If the market closes, the underlying CFD freezes.
  • Possibility of entering conditional orders such as OCO (One Cancel the other) or If Done as well as related orders of all kinds (stop, limit, mobile stop, stop if bid, etc.)

 Disadvantages of CFDs

  • Some low volume stocks are not short and / or do not allow leverage.
  • Leverage will become a problem if we do not use protection stops and we do not respect our capital management and risk control.
  • The CFD does not perfectly replicate the movement of the underlying, so on daily charts or lower (shorter time frame), we have to trade directly with the broker charts. ProRealTime stops being valid, for example. 
  • They are not particularly cheap. Global commissions, whether in the form of commission or spread, are usually relatively high. Now that you be familiar with what CFDs are and what they entail, I am going to tell you in detail the truths and lies about them.

The first thing you have to be clear about is that, if you lose money doing CFD trading, it is your fault.

But, that does not mean that trading with CFDs is easy and that you do not have to take into account some things (which we are going to see now) in order to earn money trading CFDs.

 

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