What is CFD Trading

Difference between BUY and SELL

Buy_and_Sell

Difference between BUY and SELL

Difference between BUY and SELL

CFD stands for ‘Contract for Difference’, the ‘difference’ being between the open and closing points of your trade. Firms like ETX create a contract based on current market conditions; 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’.


Leverage Trading

Leverage Trading

Leverage Trading


CFDs are both derivative and leveraged products, meaning that you don’t need to actually own the stock you’re trading and that the deposit amount needed to place the actual trade only needs to be a fraction of the amount of the trade itself. This works both ways; if the markets move in the direction of your trade, you will make a profit, while 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.

Hedging with a CFD

Leverage_Trading

Unlike some other forms of trading, when it comes to CFDs traders using the ETX MT4 platform 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 ETX MT4 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.

CFDs and Spread Betting

CFDs and Spread Betting

CFDs and Spread Betting


Although CFD Trading is one of the most popular form of derivatives trading worldwide, in the UK Spread Betting is used with far greater frequency.


CFDs and Spread Betting are almost entirely identical; both use leverage and margins, both allow traders to take a position on the rise or fall of an asset and both give you the ability to use stop losses and limits.


However, Spread Betting profits are exempt from UK Income Tax, whereas CFD proceeds are not, although CFD losses can be offset against profits for tax deduction. In addition, whilst CFD trades can be charged a commission fee – depending on the asset being traded – with Spread Betting such fees are factored into the spread itself. However, it should be noted that both long-term Spread Bets and CFDs can be subject to overnight trading charges, and with both forms of trading it is possible to lose more than one’s initial deposit.

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