What Are CFDs?
A contract for difference (CFD) allows you to trade an instrument's upwards and downwards price movements without owning the underlying asset. They’ve become increasingly popular in recent years, as they offer some key advantages, including trading on margin, the ability to go long or short and low trading costs. If you’re new to CFDs, this article will help you understand the following concepts:
What is CFD Trading?
When trading CFDs, you’re entering into a contractual agreement with a broker to exchange the difference in price between the opening and closing of a position. Unlike traditional investing, where you own the asset outright, with CFDs, you can trade the price movements of a range of instruments without ever owning the underlying asset.
Going Long vs Going Short
Going Long:
After noticing that Ethereum has been on a four-day rally, you believe that Ethereum may extend its gains for a fifth continuous day. Therefore, you decide to open a long position.
ETH/USD is trading at $4,000. You decide to purchase 5 ETH, bringing the total purchase price to $20,000. By the end of the day, Ethereum is up 5%, jumping from $4,000 to $4,200. After this price increase, you decide to close your position.
Your realized gains are $200 per ETH, which equates to a total profit of $1,000.
Going Short:
After analyzing Cardano, you believe that its price is likely to fall, so you decide to open a short position.
ADA/USD is priced at $2. You decide to sell 1000 ADA, bringing the total sell price to $2,000. Shortly after opening the position, Cardano’s price rises 3% to now trade at $2.06. After this price increase, you decide to cut your losses and close your position.
Your realized losses are $0.06 per ADA, which equates to a total loss of $60.
Note: Neither of these examples factor in leverage or trading fees. Please refer to our Key Investor Information Documents (KIIDs) to learn more about how these factors impact your trading.
What is Leverage in CFD Trading?
Leverage allows you to gain increased market exposure with less capital. This means if you want to open a position, you only need a portion of the total trade value, and your broker will effectively loan you the remaining amount.
For example, let’s say you want to buy 1 Amazon CFD. The cost of this CFD share is $3,000, as this is the price Amazon trades at. However, as you're using leverage, you won't need to pay the total $3,000 upfront. Instead, you can open a position with 5:1 leverage which means you would only need to cover 20% of the cost, which is $600.
Leverage can help increase your profit potential, but it can also magnify your losses if the market moves in the opposite direction. You should also be aware that profits and losses are calculated on your total position, not your upfront cost.
The Benefits of Trading CFDs
Benefit from price movements in either direction by going long (“Buy”) or short (“sell”).
Increase your purchasing power through leverage.
Trade 275+ CFD instruments, including cryptocurrencies, shares, forex and more.
Trade when you want - certain CFD instruments allow you to trade 24/5 and 24/7.
Utilize easyMarkets innovative trading tools to manage your risk
How to Trade Forex Pairs with easyMarkets
Benefit from price movements in either direction by going long (“Buy”) or short (“sell”).
Increase your purchasing power through leverage.
Trade 275+ CFD instruments, including cryptocurrencies, shares, forex and more.
Trade when you want - certain CFD instruments allow you to trade 24/5 and 24/7.
Utilize easyMarkets innovative trading tools to manage your risk
How to Manage Risk When Trading
How to Manage Risk When Trading
It’s important when trading CFDs that you follow risk management procedures to mitigate potential losses. To reduce your risk exposure, try implementing the following:
Create a trading plan
Blindly trading the markets and hoping for the best is a recipe for disaster. It’s important that you create a trading plan that clearly outlines your goals and how you expect to find and execute trades. A plan will also likely stop you from making impulsive decisions.
Use a regulated broker
Always select a CFD broker that is regulated. Trading with an unregulated broker means investors have no protection and their deposited funds are unlikely to be secure.
Avoid over-leveraging
If you’re new to trading, be careful not to take on too much leverage, as this can put you at risk of a margin stop out.
Use easyMarkets trading tools
Markets can quickly move against you, so it’s wise to use some of the risk management tools easyMarkets offers to prevent potential losses. Some of these include:
A guaranteed stop loss
This will automatically close a losing trade once it reaches a predetermined level.
Negative balance protection
Negative balance protection ensures that any losing positions you have open will not lead to a negative balance in your trading account.
dealCancellation
If you ever find yourself in a trade where the markets move against you, you can use our innovative dealCancellation tool. This tool will give you a time window to cancel the trade and receive your money back for a small fee. Terms and conditions apply.
CFDs FAQs
You can trade on your easyMarkets platform on any device (mobile, tablet & PC). Log into the trade zone and choose the market you want to trade from the ‘Market Explorer’. You can access all available markets on your MT4 account in the ‘Market Watch’.
CFD trading gives you a wider choice of products to access the excitement of the financial markets. Whether you have insights into agriculture, energy products, global currencies or equities, you can now get easy access to trade them. You may trade with a low margin requirement (remember - with greater leverage comes greater profit or loss). They provide an excellent alternative to suit various trading styles or methods, e.g. short or long-term investors can find the right product to complement their preferences.
We have one of the broadest selections of currencies, metals, commodities and indices available as CFDs on the market and offer some of the most competitive spreads. Combining that with top class customer service and education makes us the preferred platform for both new and experienced traders.
Your trades are executed automatically, with absolutely no requotes and you get fixed spreads and guaranteed stops on the easyMarkets platform.
We have a wide range of Cryptocurrencies, Shares, Currencies, Commodities, Metals and Indices available for Day Trading. Discover our full list of 275+ instruments here.
If you believe an asset’s price is going to rise, you open a buy position (known as ‘going long’). If you think the asset’s price is going to fall, you open a sell position (known as ‘going short’). The performance of the market governs not just whether you make a profit or loss, but also by how much. So let’s say you think a particular market will rise, and you buy a CFD - your profit will be greater the further the market rises, and your losses greater the further it declines. The same rule applies if you expect a market to fall; you’ll make more the further the market drops, and lose more the further the market rises.
Many of our CFD instruments don’t have an expiration date, except for our futures contracts, on which our Commodities, Indices and Copper are based. Please be aware that each day your trade is open you will be charged a spot fee. This fee is dependent on the value of your position.
Maximum available leverage varies among different CFDs. 30:1 for major currency pairs, 20:1 for non-major currency pairs, gold and major indices, 10:1 for commodities and non-major indices, 5:1 for shares and 2:1 for cryptocurrencies.
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