What is a CFD?
CFD is an acronym for ‘Contract for Difference’. A CFD is a type of derivative, which means that its price is derived from the value of an underlying asset. These underlying assets can include currencies, commodities, indices and shares. CFD traders never actually own the underlying asset itself, but instead speculate on the movements of its price.
In a Contract for Difference, two parties agree to exchange money based on the change in value of the underlying asset, between the point at which the deal is opened and closed. A CFD trader can make money both from an upwards or downwards swing in price. If the value of the underlying asset increases then the buyer makes money, and if the value falls the buyer loses money. Inversely, the seller will make money if the asset falls in value and lose money if it increases in value.
Who is the contract between?
CFDs can either be traded ‘Over the Counter’ (OTC) or through an exchange (Exchange Traded CFDs). ForexCT offers an OTC CFD service, which means that the Contract for Difference is made between the trader and the broker – in this case, ForexCT.
CFD traders can magnify the size of their trades by using leverage. When opening a trade the trader will put forward a certain amount of their account called the margin, and the broker (such as ForexCT) will put forward a larger ‘loan’ amount to increase the trade’s notional position. Note that leverage can significantly amplify losses as well as profits, so it’s wise to employ risk management strategies such as stop losses and take profits.
What are the differences between trading CFDs and Forex?
Forex, or foreign exchange trading, involves trading currencies against one another. This can either be a spot trade, where traders exchange cash for the currencies themselves, or a CFD trade, where traders speculate on the price movement of the currencies. ForexCT offers the second type: CFD trading for Forex and other financial instruments.
CFD and CFD Forex trading are both carried out without the exchange of the asset itself, and leverage can similarly be used to increase the size of trades. However, there are some noticeable differences between the two. Forex is traded 24 hours a day, 5.5 days a week on various exchange markets worldwide, while various stocks, commodities and indices are traded via different markets and hours. Another difference is that of the key factors that affect CFD asset and Forex prices. While commodity CFD trades are directly affected by supply and demand factors, currency values can be significantly affected by changes to central bank policies and key economic indicators such as interest rates.
Why trade CFDs with ForexCT?
- Trade with an ASIC regulated broker that’s based in Melbourne
- Hone your strategies with help from your dedicated account manager.
- Contact our team directly through your CFD trading platform, 24/5.
- Make the most of included webinars, video tutorials and resources.
CFD Trading Account
If you’ve been reading about CFD trading and would like to get started, there are two options to begin trading with ForexCT: a free demo account or a live trading account.
What does a free demo account involve?
If you’re not yet sure if CFD trading is right for you, you can practice trading without any risk by signing up to our free demo account. This account instantly gives you $20,000 virtual cash to trade with so you can develop your trading strategies, analysis and instincts using the Web PROfit platform. There is a wide choice of CFDs available across commodities, shares, indices and currencies. Trades are shown exactly the same as with our live accounts, and you’ll have access to the same risk management features.
This free demo account does not provide access to all of our useful webinars, tutorials and resources, so once you’ve got a feel for the platform and trading environment you can simply switch your demo account to a live account with a minimum deposit.
How do I get started with a live trading account?
You’ll need a minimum $500 deposit to get started with a live ForexCT account, although many traders choose to deposit more. Your live account provides access to both of our trading platforms, WebPROfit and Mobile.
We recommend having at least a basic understanding of CFD trading before you enter your first trade, and our included resources will help to build your skills and understanding. With a live ForexCT account you’ll gain access to our free online trading course, Forex eBook, webinars and other resources. Once you are registered you will also begin receiving our free daily market reports where we regularly cover the major commodities, indices and shares.
Ready to begin? Simply visit our Sign Up page and select your preferred account type. If you have questions about getting started, contact our Australian support team on 1800 367 392 or email email@example.com
How to Trade CFDs
A smart trading strategy involves preparation. Follow these five steps to opening your first CFD trade.
Step 1: Select your market
The first step is to choose your trading market and symbol. Will you trade CFDs on silver, speculate on the value of wheat or follow the price of a major index? Use your free resources and research widely to gain an understanding of the markets you intend to trade in. Different financial instrument prices will be more or less volatile than others and be affected by unique dynamics including supply and demand, so it’s important to have a general understanding of the relevant factors.
Step 2: Choose the direction of your CFD trade
CFDs allow you to speculate on both upward and downward moving prices, so you’ll need to identify which direction you think the market will be moving in next. If you think the price will increase you will want to buy, or go long. If you believe the price will decrease then you will aim to sell, or go short. Here’s where your research and technical analysis can be of benefit.
Step 3: Choose your entry and exit levels
Before any trade, it’s a wise move to choose your entry and exit points so your decisions will be based on cool and calm logic. The last thing to do is change the exit point after you’ve entered the trade, as doubt could see you exiting too early or too late. Develop your CFD trading strategy and put tools such as support and resistance levels to good use in order to set your entry and exit points. You can then set take profit and stop loss orders to automatically close out trades if they go above or below those levels.
Step 4: Choose your trade size
Risk management is an important part of any CFD trade, and one of the most effective ways to control your potential losses is to choose appropriately sized trades for your risk profile, trading instruments and account size. Many traders will start small and build the size of their trades as they become more experienced. The same may apply for the amount of leverage applied.
Step 5: Enter and monitor the trade
Here’s where the action happens. If you have decided on your symbol, your entry and exit points and your trade size, then you can execute your trade. You can use your mobile trading platform to monitor the position as it moves towards either of your exit points. The hardest part can be to avoid exiting too early, but if you have done your research and set your exit points effectively you’ll find it easier to hold your nerve and close the trade at an appropriate time.
Ready to begin trading? Begin with a free demo account or register for your live account now.
CFD Trading Vs. Share Trading
CFD or share trading? It’s a common question for Australian traders who are looking for the best way to grow their assets, and in fact many trade in both. Let’s take a look at the key differences between the two options.
What are the differences between share trading and CFD trading?
The key difference between share and CFD trading is that with CFD trading, you don’t own any aspect of the underlying financial instrument itself. You are forming a contract between yourself and your CFD broker – in this case, ForexCT. When trading CFDs you can make a profit if the market moves in your favour, whether that prediction is that the price will move up or down. CFD trading also gives you the opportunity to trade on a wider range of financial instruments, including commodities, currencies, indices and shares, on various markets that are open at different times of day. Share trading, on the other hand, involves the purchase of equity securities.
Another major difference is that CFD trading enables traders to open larger positions than their own account would typically allow by using leverage. The trader’s required margin may only be 1% or 0.5% of the trade position, with the rest of the position being temporarily provided by the broker. Depending on the amount of leverage and the trader’s decisions, the resulting return or loss can be much greater than would be obtainable without leverage.
Are there risks to trading CFDs?
As with any form of trading, there are some risks involved. For CFD trading, leverage can bring some risk because it can amplify both profit and loss. Traders can minimise risk by placing stop losses on their trades, limiting the size of each trade and opting for lower levels of leverage.
Which option is best for me?
This will depend on your trading strategies, your amount of capital, your risk profile and the hours you have available to monitor your chosen markets. CFD trading may be for you if you are looking for a wide range of trading opportunities, wish to trade outside normal trading hours and would like to be able to speculate on prices as they fall and rise. You can begin with a free demo account with ForexCT to decide whether CFD trading is right for you, or sign up for a live account.
CFD Trading Strategies
Having clear trading goals and techniques will help you to minimise risk, enter and exit trades at optimal times and minimise uncertainty in your decisions. It’s important to ask yourself the following questions and define the answers before entering your trades:
What type of trader am I?
Are you more of a day trader or a swing trader? The former will typically close out trades before the end of each day, while the latter may keep trades open for days, weeks or longer. It’s important to find out which style works best for your own lifestyle and occupation.
Why am I trading?
Those who are aiming to build up a trading career will have different strategies to those who have an interest in trading part time. Understanding how much you want to grow your portfolio - and how soon - will help you to put suitable methodologies in place.
Will I trade long or short?
If you expect a price to increase, you will want to take a long position or open your trade using a ‘buy’ order with the plan to close it with a ‘sell’ order. If you expect the value to decrease, you’ll want to take a short position or open your trade with a ‘sell’ order with the aim to close it out with a ‘buy’ order.
When should I enter and exit the trade?
You can use a range of fundamental and technical analysis and tools to decide when it’s best to enter and exit your CFD trades. These may include support and resistance levels, moving averages, oscillators and economic data releases that could help you to understand the market’s movements.
How will I manage risk?
An important part of any CFD trade is minimising your risk should the price go in the opposite direction than you anticipated. Risk management strategies include limiting your leverage and trade size, diversifying your trades and putting stop loss orders and/or take profit orders in place.
Effective trading strategies will help you to become consistently profitable in your trades. Be sure to work with your account manager to develop your strategies and be able to make trades with confidence.