What in the World is CFD Trading About?

Looking for a little more adventure outside the spot forex market? Here’s a quick introduction into CFD trading and how you can profit from it.

What the heck is a CFD?

CFD stands for contract-for-difference, which is basically an agreement between two parties to pay the difference in the underlying asset’s price from its current value and its value at the time the trade is closed. This is considered a financial derivative, as it allows traders to take advantage of price movements without actually owning the asset itself.

How can you make money trading CFDs?

When you buy a CFD and the asset price goes up, you will receive the price difference multiplied by the number of units you’ve purchased. If the asset price drops, you will pay the price difference instead.

On the other hand, when you short a CFD and the asset price goes down, you will receive the difference between the closing price and opening price multiplied by the number of units you’ve purchased. If the asset price goes up, you will pay this price difference to the buyer.

Wait a minute. How is this different from forex trading?

Excellent question, young padawan! In the spot forex market, a trader essentially buys or sells a specified number of units of a currency pair at a certain price then gains or losses are determined based on the difference of the opening and closing price. Other similarities of CFDs and forex trading include OTC execution, a decentralized exchange, and some execution costs such as spread and commissions.

What sets CFDs apart from forex is that the former spans more financial markets, such as commodities and equities, which allows a trader to diversify his positions. You can speculate on global stock indices such as the S&P 500 or FTSE and trade the price of soybean against the U.S. dollar. More possibilities, more profit opportunities!

Sounds great! Where do I sign?

Hold your horses! Before forking over your hard-earned cash to trade CFDs with a broker, make sure you do more research on this type of trading instrument first. While forex trading is mostly driven by fundamental and technical factors, CFD price movements are generally influenced by supply and demand specific to the asset being traded. For example, price fluctuations for several commodities can be subject to seasonal factors while stock price trends may be dictated by earnings reports.

Make sure you also read up on how transaction costs are computed, as some asset classes are subject to commission fees while others aren’t. CFDs are also typically subject to a daily financing charge if you plan to keep trades open overnight. Margin requirements also vary among brokers so make sure you’ve properly understood the concept of leverage as well. As with forex trading, I highly encourage you to try a demo CFD account first before going live!

Is CFD trading something you’re interested in or already trying out? Share your thoughts and experiences in our comments section!

  • ForExchange

    Hi Forexninja!

    I did not have much knowledge about CFDs so your article was great. Maybe you can make some other articles about it.

    It sound interesting also because actually my broker does offer all the products (that you mentioned) on the trader software. Know I know that besides spot forex I was also trading CFD.

    Also important to mention the different minimum lot sizes. These mean a larger pip value and that is why the margin requirement is extremely important (like you said).

    I also realized that I pay for silver this overnight commission. Can you please explain why is that? In spot forex the rollover cost is obvious, but I do not know why is that with commodities. With rollover we can also earn money, depending if we are short or long. I guess with commodities we have to pay for “both directions”. At least I never have seen to get money at night.

    • Oh wow, thanks for the positive feedback. I really appreciate it! I’m thinking of doing a follow-up article on CFDs, possibly to discuss the rest of the details like lot sizes and commissions. As for commissions, I’ve always taken that “as is” thinking that it’s part of holding the contract or something, regardless of which direction you take. I’ll look more into this though. Good to know that forex traders are also interested in this kind of trading instrument!

  • westonmare

    No one make a profit, only the crook who operates this scam. most they are regulated by similar crooks the banks,and Gov ..
    One or two do make a profit , lets say they have to , its like a casino, if everyone went there and they all lose they would not be in business .
    Here its the same , similar scam . On 100 thickets i dealt on going long, 97% of them the market went down, I have no doubt that they run against people like me for their own interest. The whole market its a bib scam the biggest of the Century and its regulated !! what a joke, a regulated robbery !

    On 100 tickets I dealt of going short , 98% of the trading markets went up straight away. Its clear that they are using a special software rigged against people like me and you ! keep away from those crooks .
    Brokers = bandits

    • Thanks for checking out my blog and for sharing your interesting thoughts.

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  • Thanks for checking out my blog and for sharing your thoughts! Yeah I do agree it takes a bit of understanding and research on the industries involved. How long do you keep your CFD positions open?

  • Glad you like the article! Pretty interesting to see how the COT positioning also applies to commodities and can be used to gauge sentiment as well. I’ll try to post more articles on this topic then. See ya!

  • Ha! That’s one way to put it! Thanks for checking out my blog and taking time to read the comments as well.

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