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  • What are CFD’s

    //What are CFD’s
    What are CFD’s2018-05-14T15:02:08+00:00
    CFD stands for ‘Contract for Difference’, the ‘difference’ being between the open and closing points of your trade. CFDs are derivative products which Fortrade creates a CFD contract based on current market conditions which enables you to trade on the price movement of underlying financial assets. We offer CFDs on a wide range of global markets and our CFD instruments includes shares, treasuries, currency pairs, commodities and stock indices, such as the UK 100, which aggregates the price movements of all the stocks listed on the UK 100.

    The contract will have both a ‘buy’ and ‘sell’ price and you have the option of choosing to either ‘buy’, also known as going long, or ‘sell’, known as ‘going short’. It’s important to remember you’re trading CFD contracts, not physically trading in the underlying market. While CFD product is very flexible giving you the ability to use stop losses and limits. It also requires a high level of risk management by using STOP orders.

    CFDs use leverage and margins.  This means you only have to put down a small deposit for a much larger market exposure. This is called ‘trading on margin’. You only need to deposit a small percentage of the full value of the trade in order to open a position.

    While trading on margin allows you to magnify your returns, losses will also be magnified. Leverage comes with significant risks. Although your investment capital can go further, if the markets move in the other direction to your trade you will make a loss and the money you lose can exceed the amount you placed to make the trade. You could also lose more than your initial deposit.

    CFD trading enables you to sell (short) an instrument if you believe it will fall in value, with the aim of profiting from the predicted downward price move. If your prediction turns out to be correct, you can buy the instrument back at a lower price to make a profit. If you are incorrect and the value rises, you will make a loss.

    Spread: When trading CFDs you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favour before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.

    Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.

    We set a price for a contract based on the underlying market, which you can buy or sell.

    With each market you are given a ‘buy’ and ‘sell’ price either side of the underlying market price. You can trade on a market to go up (known as ‘buying’ or ‘going long’), or you can trade on it to go down (known as ‘selling’ or ‘going short’).

    Once you open your trade, you’ll receive a confirmation message to show that it has been accepted. Trades are occasionally rejected, but the vast majority go through without any problems. Check the details on your confirmation message carefully to make sure the trade is as you intended.

    Your open trade will now appear in the ‘open positions’ pane in our trading platform. All the time your position is open, you’ll be able to see your profit or loss by checking the profit/loss column.

    When you decide to close your position and collect your profits. To do this, you simply sell the same number of contracts as you bought initially.

    The simplest way of doing this is to bring up a ‘close position’ screen. When you click on ‘sell’, you’ll receive another confirmation to let you know that you’ve sold that number of contracts.

    Trading CFDs and other leveraged products carries a high level of risk to your capital as prices may move rapidly against you. You can lose all, but not more than the balance of your Trading Account.
    Unlike some other forms of trading, when it comes to CFDs traders using the Fortrade platform traders have the ability to hedge their trades, which can be beneficial when it comes to limiting potential losses.

    For example, let’s say that I currently have an open position on Dollar/Yen – I ‘went long’ buying the Dollar in the expectation that USD would strengthen against the Japanese currency. However, I’m now having second thoughts – not enough to make me want to close my trade, but sufficient doubt to make me slightly uncertain that my hoped-for currency strengthening will occur.

    In other forms of trading, I would have two choices; close the trade now or keep the trade open and cope with the uncertainty. However, with a CFD I can simultaneously open another Dollar/Yen position in which I short the Dollar – going the opposite way to my original trade, which is still open. Traders should keep in mind that CFDs can only be hedged using the Fortrade platform.

    If the currency pair subsequently moves the other way to my original trade – with the Dollar falling against the Yen – I’ll still be able to salvage something from the situation, because my hedge will then take effect.

    If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.

    For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end and the value of your physical shares starts to rise again.

    Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.

    So, how exactly does one trade a CFD? Let’s take a look at an example of a CFD trade using the popularly traded GER 30 index as an example;

    In the following theoretical example, the GER is currently trading at a level of 9610.5/9611.5, giving me the option of selling the German index at the 9610.5 level or buying at 9611.5. I decide to buy £5 of the GER at that 9611.5 level, and my nominal risk in this instance would be worked out as follows;

    (Level I’m buying at x the amount I’m buying)

    So in this case the nominal risk would be;

    9611.5 x 5 = 48057.5

    £48,057.50 is the maximum amount of money I would stand to lose if the GER dropped from its current 9611.5 level to zero.

    As a form of trading involving leverage, instead of having to put down the cost of the trade in its entirety (at 9611.5 x 5 that would cost £48,057.50, the same as my nominal risk) I only need to put in a small percentage of the overall value to initiate the trade. We work this out as a percentage of the nominal risk – if the margin is 1%, then 48,057.50/100 = 480.575. Therefore, rounding upwards by a penny, £480.58 is the amount needed to initiate the trade.

    If, however, I had decided to sell £5 of the GER instead of buying it, the price of my trade would be as follows;

    9610.5 x 5 = £48,052.5

    The amount I would need to put into my trade would therefore be 1% of that, meaning £480.53

    Traders are advised to remember that increasing leverage increases risk

    Going back to the scenario where I bought £5 rather than sold, if the GER subsequently moves up to a level of 9613.5/9614.5 and I decide that this would be a good point for me to exit the trade, I would work out the profit on my trade as follows;

    the amount I bought x the number of points that the trade has moved in my favour.

    In this case my profit would therefore be 5 x 2, meaning that I would make a profit of £10 on the trade.

    Alternatively, had I sold £5 of the GER at the 9610.5 level and then closed the trade at that 9613.5/9614.5 level, my loss would be 5 x 4, seeing as the price of my closing trade would be four points higher than when I opened it. In this case, my loss on the trade would be £20.

    If however, the GER fell from 9610.5/9611.5 to 9608.5/9609.5 – had I bought £5 of the GER at the original level my loss would be calculated as follows; the amount I bought x the number of points that the trade has moved against me.

    In this instance my loss would be 5 x 3, meaning that I would make a loss of £15. On the other hand, if I had sold £5 of the GER at the original level then my profit would be 5 x 1, giving me a profit of £5.