What Is CFD Trading & How Does It Work

Contract for Difference trading is a way of speculating on the price movements/value shifts of financial assets without owning the target asset. You profit or lose depending on the difference between the entry and exit price of the instrument at the time your contract is closed.

Let’s break down how it works, share its benefits and risks:

The Fundamentals

Price forecast: When speculating price fluctuations, you can either anticipate it to rise or fall. If you expect it to go up, you buy. You sell if you think it will go down. You profit when the market moves in the direction of your prediction. You lose when it doesn’t.

Zero ownership of the traded instrument: Here, you are not buying/selling the actual currency, commodity, or stock. You are simply entering into a contract with your trading platform or liquidity provider to exchange the difference in the asset’s value between the time you open the trade and when you close it.

Leverage: Assets here are traded on margin. You can control a bigger position that can amplify your profit or your loss with a small capital/deposit.

PnL calculation: Your gain or loss is calculated by taking the difference between the opening and closing prices of your CFD trade, then multiplied by the number of units (lots) you traded.

Key Advantages

1. The number one benefit of CFD trading is the ability to control a bigger position with less upfront investment – leverage.

2. Another beautiful part is that it gives you access to diverse markets. You can trade forex, indices, energy, crypto, stocks, commodities. You can trade whatever symbol you want as long it is available on the platform. You are not limited to an asset.

3. Lastly, you can profit from both rising and falling prices. Unlike investing in traditional stock where you primarily gain from bullish prices, CFDs allow you to go short and profit from declining markets.

Cons

Margin calls: Since you are trading a leveraged product, a severe price move against your position can trigger this equity warning, prompting your trading platform to request you to deposit additional funds in order to maintain your current position. And failure to top up may result in the position being automatically closed (at your loss).

Volatility and gaps: Financial markets can be very volatile. Prices can suddenly jump (gap). This can result in stop loss orders being executed at less favourable prices than anticipated.

FAQs

Is CFD trading legal?
It is legal in many countries. All you want to do is confirm its legality in your jurisdiction, and also check if your chosen trading platform accepts or blacklists your country.

Is XAUUSD a CFD?
Yes, XAU/USD as a pair is a CFD.

Is BTC or crypto a CFD?
Bitcoin or cryptocurrencies themselves are not Contract for Differences, but (it) they can be traded as such.

Which CFD account is best?
The “best” account would depend on your needs. If you want to work with a company with a good reputation, a modern trading platform with helpful risk control features, RebelsFunding is the place. It has affordable and appealing CFD trading programs.

How to start CFD trading?
In the context of prop trading, you want to choose a stable, reliable firm with a positive reputation (for example, RebelsFunding). Pick a program, make payment and begin your evaluation process. Get funded to trade any CFD of your choice, after a successful challenge phase.

Related article:

Common CFD trading strategies