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Example trade of using a CFD to go short

What can you do to benefit when stock markets are falling? There are two choices: buy something that rises when other markets fall or go short.

Using CFDs to ‘Go Short’

Sometimes When markets are falling, there is just nothing worth buying. An old saying in trading goes “Don’t try to catch a falling knife.” It means stocks that are falling fast can quickly fall below your order to buy.


“Don’t try to catch a falling knife”


Traditionally in the stock market, investors will buy stocks and only make a profit when shares go up, this is known taking a long position. A benefit of trading CFDs is that they allow you to speculate on both rising and falling markets.


Traders can take a short (sell) position. This provides additional trading opportunities because you can profit both from buying (going long) and from selling financial instruments.

 

Example trade

Trade using a CFD

You sell 0.5 CFDs of the ‘Germany 30’ index at €12,000. Each CFD is worth 10 times the index rice so the size of your trade is €60,000. If the price falls €100 to €11,900, and you close the trade, you make €500 in profit. If however, you sell 5 CFDs of ‘Germany 30’ at €12,000 and the price rises by 100 points, once you close the trade, you would lose €500.

 

What are the risks?

It’s important to understand that when you buy an investment (go long) the worst thing that can happen is the investment goes to zero - becomes worthless. When you sell something (go short) the value of the investment can in theory go up infinitely, meaning your potential losses are infinite.


It is for this reason that going short should only be done with sound money management rules including a pre-defined exit strategy.

 

 

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