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How to Trade CFDs

HOW DO YOU TRADE CFDs?

CFD_Trading

HOW DO YOU TRADE CFDS?

HOW DO YOU TRADE CFDS?

Companies offering CFDs typically provide quotes that comprise of a ‘bid’ or ‘sell’ price, and a slightly higher ‘offer’ or ‘buy’ price. For example, if the S&P 500 index hypothetically stands at 2000, a CFD brokerage may offer clients a bid price of 1998 and an offer price of 2002, which would be presented in the format: 1998/2002.

Depending on the future outlook of the market price of a security, a trader can then decide whether to ‘buy’ or ‘sell’ a position. For example, if a trader believes that the S&P is likely to increase in value, they would buy, or ‘go long’, with the intention of selling at a higher price in the future. On the other hand, if a trader predicts that the index will decrease in value, they would sell, or ‘go short’ – in hope of buying back at a lower price when the index later decreases in value.

CFD TRADING SCENARIOS

CFD TRADING SCENARIOS

CFD TRADING SCENARIOS

Here we give an example of a CFD trade with the Dow Jones Industrial Average (DJIA), one of the world’s most widely monitored indices. The DJIA consists of 30 of the most significant stocks traded on the New York Stock Exchange and the Nasdaq, with companies listed on the DJIA including American Express, Disney and Microsoft.

In this scenario, the DJIA is currently trading at a hypothetical level of17500/17505. A trader has the option to either ‘sell’ at 17500, or ‘buy’ at 17505. In this instance, the trader buys £10 of the DJIA.


Calculating profit for CFDs

So far, in our example, the trader has bought £10 of the DJIA at the level of 17500/17505. After some time, the index value increases to a level of 17520/17525 and the trader decides to close his position. To calculate the profit on his trade:

Profit made = amount bought (£) x number of points the trade has moved in trader's favour

The trader bought at 17505; if he now sells at 17520 then the trade will have moved 15 points in his favour. His profit would therefore be £10 x 15 = £150.

By contrast, if the trader had instead originally chosen to sell £10 of the DJIA at the 17500/17505, and closed the trade at the 17520/17525 level, the trader’s loss would have amounted to £250 (£10 x 25), as the buy price when the trader chose to close (17525) is twenty-five points higher than the price the trader sold at when entering the trade (17500).


An Example of a Losing Trade

If the trader decides to close their trade at this point, he would lose £250 (£10 x the 25 points that market has moved away from his position).

However, if the trader had instead sold £10 of the DJIA at its original level, they would make a profit of £150 (£10 x the 15 points that the market had moved in their favour).

However, if the trader had instead sold £10 of the DJIA at its original level, they would make a profit of £150 (£10 x the 15 points that the market had moved in their favour).

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