CFD trading is a very popular way of trading. CFD is the acronym for Contract for Difference. It is a form of trading that allows someone to buy or sell based on the difference in prices of an asset. In the remaining part of this write-up, we will enlighten you about CFD, its advantages and disadvantages.
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What is CFD trading?
As we mentioned earlier, CFD stands for Contract for Difference. It is a kind of trading instrument. It enables different categories of investors to make a profit from the financial markets. You can start accessing CFD on the platforms of brokers. You can trade CFD in different categories of assets; some of the assets are:
- Spot metals
- Commodities
- And Forex
CFD trading is a kind of derivative trading. As a result, it derives its values from how the underlying asset moves.
How profit and loss work in CFD
In CFD, the trader speculates on the change in the price of the asset. He can speculate that the price will rise or fall. If his speculations are correct, he will make a profit. The reverse is the case if his speculations about that asset are wrong. The broker will look at the difference between the prices of the asset to determine profitability. He will compare the price when the trade began and the price when the trade closes. If the calculation agrees with the speculations of the trader, then the broker will pay him his profit. If the reverse is the case, then the broker will deduct the difference from the account of the trader.
The profit and loss come up by subtracting the price at entry from the price at the exit and multiplying the answer by the number of CFD units. As we mentioned earlier, you can trade CFD in many markets, like commodities, spot metals, and even Forex. Those into CFD trading in Canada can also trade CFD with cryptocurrencies and indices.
How to engage in CFD
Trading CFD occurs on the platform of online brokers. Those who trade CFD engage in a contract with the broker. The trader is the buyer and the broker represents the seller. The two of them agree to the contract before it can be of effect. The contract speculates on the particular price of the asset in a given market condition. The buyer (or the trader) speculates on the particular asset and the seller (the broker) ascent to the speculation.
How does CFD trading differ from traditional trading?
- In traditional trading, you need to own the asset before you can trade it. This is never the case when you trade CFD. In CFD, there is no need to own the asset before you can trade it.
- When you trade CFD, you can make a profit when the value of the asset goes up or down. In traditional trading, a fall in the value of the asset you own can put you in debt.
- Traditional trading can be costly. However, CFD trading is not as costly as the traditional form.
How to start trading CFD
There are certain steps to consider before you can start trading CFD in Canada. We will look into these steps below:
Choose an instrument
We mentioned above that you can use CFD trading in several instruments. So, you need to choose the instrument you prefer. Some of the available instruments are:
- Commodity CFDs
- Index CFDs
- Cryptocurrency CFDs
- Share CFDs
- Forex CFDs
The CFD you choose depends on the area where you have good knowledge. It also depends on the trading strategy that you have. If you have limited experience with the one to choose, you can partner with experts for help. The factors surrounding that asset can also help you to make the right choice. Is the trading cost high or low? Does it have a history of profitability?
Choose a position
After you make the choice above, the next thing is to choose a position before you venture into CFD trading in Canada. Choosing a position is the actual trading activity. If your strategies suggest that the value of the asset will rise, you can choose a buy position. If the reverse is the case, then you can choose a sell position. Another name for a buy position is “going long”. Another name for a sell position is “going short”.
You can use indicators to help you choose the right position. The CFD brokers can provide you with signals, charts, and indicators to help you make the right choice. At the same time, no signal or indicator is correct 100% of the time.
In CFD trading, you also need to determine the size of that position to trade. You can do this by calculating the number of CFD units that agree best with the strategy you are using.
Choose a trading platform
You can trade CFD on either MT4 or MT5 trading platform. The trading platform is available on desktop, laptop, and mobile devices. You can also access a WebTarder platform. Some other brokers offer proprietary trading platforms. The trading conditions differ from one trading platform to another.
Conclusion
From the above, you would have learned a thing or two about CFD trading and how to go about it. If you want to make a regular profit from trading CFD, you should choose your broker carefully. Additionally, you should practice your trading strategy extensively before you go into live trading. Online brokers in Canada offer demo accounts that can help you to better understand how to use your preferred strategy.