What is CFD trading ?
CFD trading is a type of trading that allows you to speculate on the price movement of financial instruments without actually owning the underlying asset.
For example, traders can open a CFD account with a broker to trade stocks, indices, forex, commodities and more.
Brokers offering CFD trading are in demand because CFDs allow you to trade on leverage, which means you can open a position with a fraction of the capital you would otherwise need to buy the underlying asset outright. CFD trading is also flexible, which means traders can use the same trading account to go long or short on a CFD depending on your market view.
How does a CFD trading platform work ?
A CFD trading platform is software that your broker offers to trade contracts for difference (CFDs) on financial markets. When you open a CFD account with FlowBank or with one of the many other brokers, a platform is usually provided for free alongside the accounts. Platforms provide you with real-time market data and enable you to place and manage your trades, often with access to leverage to place trades on margin using a smaller amount of capital.
Most CFD trading accounts have platforms that are web-based, so you can access them from anywhere in the world while the best brokers also offer mobile apps, so you can trade on the go. A FlowBank account offers a number of options for the platform, including the FlowBank app, FlowBank Pro desktop application and Metatrader, both MT4 and MT5.
How to choose your CFD trading platform ?
There are a lot of CFD brokers and platforms to choose from, so it takes some digging to choose the best broker. Firstly, you need to consider what your goals are as a trader. What are you looking to trade? What markets are you interested in? How much risk are you willing to accept? Most new traders are categorised as retail traders. Retail traders trade for themselves and need a retail broker. Once you know this, you can start to narrow down your options.
Secondly, the trading platform should be from a regulated broker. FlowBank is regulated as a Swiss Bank by FINMA.
Next, you need to look at the features and functionality of platforms. What tools and resources does it offer? Does it provide real-time market data? What amount of leverage is available? Is it user-friendly? It is possible to find out what other traders think of a broker and its platform tools through online trading forums.
Finally, you need to consider financial costs. All online brokers charge a spread on every trade but some CFD accounts charge commission on trades, some stipulate minimum deposit requirements while others offer different margin requirements or may have monthly fees or annual fees for use of data or different platforms. You can find the details of FlowBank CFD account pricing and fees here.
How do CFDs work ?
When you trade CFDs, you don’t actually own the underlying asset. Instead, you are entering into a financial contract with your broker to speculate on how high or low the price of the asset will go. If the price moves in your favour, you will make a profit. The risk is that it can also move against you so you will have a losing trade. Your broker will add to or subtract from your account balance, according to the result of the trade.
CFDs are a leveraged product, so you only need to put down a small deposit of money (margin) into your trading account to open a position. Using margin gives you the potential to make a much larger profit (or loss) than if you were to trade the asset outright. The use of leverage means a higher risk of losing more than your initial deposit.
Which assets can I trade as CFDs ?
There are four main asset classes that a broker will typically offer to be traded as CFDs: indices, forex, commodities, and stocks. Each asset class has its benefits and carries its own risk to your trading capital. FlowBank accounts offer traders a wider variety beyond the main four, including cryptocurrency CFDs as well as CFDs on options, interest rates and bonds.
Indices CFDs allow you to trade on the movement of a basket of shares, rather than just one stock. The best known index CFDs are for the S&P 500 and Wall Street.
Forex CFDs allow you to trade on the movement of currency pairs and can be a great way to hedge against movements in the real-world currency markets. Brokers will normally offer all major forex pairs while other brokers also offer minor and exotic pairs.
Commodities CFDs allow you to trade on the movement of underlying commodity prices and can be a great way to diversify your portfolio.
Stocks CFDs allow you to trade on the movement of individual shares and can be a great way to get exposure to the underlying companies.
What are the different types of CFDs ?
Traders can choose between many different types of CFDs, including those based on stocks, indices, foreign exchange, commodities, and even cryptocurrencies. Each type of CFD has its own unique characteristics, spreads, fees and risks and each broker will offer different types, so it's important to understand the differences before deciding which type of CFD trading is best for you.
What are the steps involved in CFD trading ?
The key steps for a trader to get involved in CFD trading are as follows:
Choose a CFD broker
Open the account
Research the markets
Place a trade
Monitor your trade
Close your trade
Earn a profit or loss
Find your next trading opportunity
What markets can I invest in with CFDs ?
There are a number of markets you can invest in as a CFD trader, including indices, stocks, commodities, forex, and more. Brokers can charge different spreads and fees according to the different markets. They will also offer different leverage ratios for each market and also give traders the ability to trade short, which can be helpful in a bear market.
How long do CFD transactions take ?
CFD transactions can take anywhere from a few seconds to a few minutes, depending on the size and complexity of the trade. In general, however, most CFD brokers execute trades almost instantly. This is one of the major benefits of CFD trading – it allows traders to capitalise on short-term market movements without having to wait for the flow of money as their trades to settle.
How do I calculate the profit or loss of a CFD trade ?
To calculate the profit or loss of a CFD trade, you need to take into account
The size of the contract,
The underlying asset's price movement
To calculate the P&L of a long CFD position, you subtract the entry price from the exit price, and then multiply this by the number of CFD contracts you traded.
To calculate the P&L of a short CFD position, you subtract the exit price from the entry price, and then multiply this by the number of CFD contracts you traded.
NOTE: In each example, the spreads are reflected in the buy and sell prices.
CFD Trading Example
If you think the price of Apple stock (ticker AAPL) is going to go up, you could buy a CFD through your broker that gives you the right to buy the stock. If the stock does indeed go up in price, you can then sell the CFD and make money by pocketing the difference. However, if the stock price goes down, you will lose money since you will have to pay the difference between your entry price and your lower exit price.
For example, let’s say you have put aside some money exclusively for investing and have $1000 to invest and each Apple share is worth $100. Each CFD is worth 1 share so you could choose to buy 10 CFDs of Apple shares for $100 each. You will also need to pay spreads and a commission on the trade.
What strategies are commonly used in CFD trading ?
Common strategies used by CFD traders include trend following, scalping, and contrarian trading. Trend following involves traders taking a position in the direction of the overall trend. Scalping involves trying to take small profits on a regular basis. Contrarian trading involves taking a position against the market trend.