Traders often use CFD contracts to expand their trading instruments. They provide an opportunity to profit from uptrends and downtrends. Let’s talk about what CFD contracts are and what you need to know to use them correctly and make a profit.
A CFD contract (Сontract For Difference) is a pact made between two parties (a seller and a buyer) to transmit the price difference between an asset’s opening and closing prices during a trade. Traders frequently employ this derivative instrument.
Using CFD, you can fully trade different assets at the same time – stocks, indices, and currencies, including digital ones. But the stock market, when using such contracts, wins significantly, since the trends on it last longer, and when reports are released, securities of different issuers show a significant movement.
CFD handel is the execution of trading operations for the purchase and sale of assets on the exchange and currency market. Let’s explain how it works. When, for example, a trader makes a prediction that a stock of a certain company should increase in price from $500 to $600, he can open a buy trade at the current price and close it when it reaches the estimated mark. Trading CFD contracts in such a situation does not have significant differences and is not more difficult than trading real securities. You can make a profit by increasing quotes.
Consider another situation where a market participant assumes that the price of shares will start to fall. Then it is impossible to sell them according to the classical scheme, so you should use a CFD contract for a decrease. For example, a trader assumes that the value of a company’s shares will drop from $500 to $400. If the forecast is correct, you can make money on a downtrend. To this end, they open a short position on CFD on the company’s asset at a price of $500 and set a take profit at $400.
We have already figured out what CFDs are and found out that you can make money on them by choosing one of two tactics. Let’s consider them in more detail.
When predicting an increase in the value of assets, a trader trades in stages:
With this type of trading, the success of the transactions made largely depends on the experience of the market participant.
Trading with a forecast of a decrease in the price of assets is carried out in the following stages:
When there are fluctuations in the exchange and, in the opinion of the trader, the asset has reached its potential, he can close it manually. The market participant also has the opportunity to move Stop Loss to a breakeven area or to a position with a low income if the price of the selected asset is in a profitable area. When this cannot be done manually, a trailing stop loss can be activated. It is set automatically at the required level from the current price.
Just like in Forex Handel, CFD trading should be done only through a reliable broker. It is worth checking whether the company has a valid license and whether it provides access to different trading platforms.
Among the advantages of trading using CFD contracts, it is worth highlighting:
When using CFDs, you may face different risks:
A trader can choose the instruments for trading depending on the situation. In some cases, it is better to use CFD contracts, in others – stocks, currencies, etc.
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