How to trade CFDs
CFDs are usually traded online using electronic trading systems. A trader receives quotations in real time and can make his/her transaction at any moment.
For example, a trader plans to purchase euro against dollar. In the quotation/transaction window he sees a current Bid and Ask price similar to the line below (demonstration only):
1.38505 / 1.38510
The difference between the Bid price and the Ask price is called the Spread. A trader can sell at the Bid price and purchase at the Ask price. For the euro/dollar pair, a change in price by 0.0001 is referred to as a change by 1 pip, with the spread in this case being equal to 0.5 pip. This is a very small spread and is usually available for CFD Online Trading on ECN accounts. Other accounts can have a spread of up to 2 pips, which is also very small.
To purchase euros, the trader needs to determine a transaction volume (for instance, 1 lot which equals 100,000 euros) and press the "BUY" button. The result of the operation will be reflected in the "Trade" window of the trading terminal.
Let's assume that the price has increased and the new price is:
1.39010 / 1.39020
The trader is happy with the increase and decides to close the position. To do that the trader must choose a position at which to close and press "Close on the current price". The closing of the position (that is, selling the previously purchased euro) will occur at the price of the BID that is 1.39010.
This transaction will lead to the following situation:
- The trader will have purchased 100,000 Euros (1 lot) at a price of 1.38510 by spending100,000 * 1.38510 = 138,510 dollars
- The trader will have sold 100,000 Euros at a price of 1.39010 and received 100,000 * 1.39010 = 139,010 dollars
- The difference of the transaction is: 139010 - 138510 = 500 dollars
- The sum of 500 dollars is the trader's profit in this case.
How much funds do you need in your account to open such a position? It depends on your leverage ratio, which is usually 100:1 in CFD Online Trading. It would be enough to have:
138.510 / 100 = 1385.1 dollars, or 1000 euros (if the trader's account is nominated in euro)
Thereby, the leverage ratio has provided a tremendous profitability based on the invested money which is 500 / 1385.1 * 100 = 36.09%
This sort of gain can occur very quickly; in fact, such changes in price can happen within minutes. However, it is also possible to lose money due to the risks of in CFD Online Trading. A leverage ratio is given to a Trader by our Company and in reality represents borrowed funds secured by the trader's deposit. So that the trader does not get into the Company's debt when a loss is incurred, his/her position is automatically closed when the deposit value approaches 0. Thus the trader can lose his/her own money but will not be in debt to the Company.
As shown, the in CFD Online Trading process is very simple; any instruments can be traded in this way with the only variation being the leverage ratio for different instruments.