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Introduction to CFD Trading

A CFD is a popular derivative financial instrument available at Xtrade Australia. CFD stands for Contract for Difference. The definition of a CFD is easily derived, since CFDs are contracts whereby the trader and the broker agree to exchange the difference in value between the opening and closing price of the contract. Right off the bat, it should be noted that CFDs are extremely risky financial instruments and the majority of traders lose money with CFDs.

CFDs mirror the prices of the assets they represent. In financial jargon, these are known as the underlying financial instruments. Therefore, a Share CFD representing Google (NASDAQ: GOOG) may be priced at $2750 (AU$3850), which is usually identical to the actual share price of Google on the NASDAQ. That's why the word derivative is so important; CFD prices are derived from the assets they represent.

Therefore, if the underlying financial instrument rises in price then the price of the CFD rises accordingly. If the underlying financial instrument falls in price then the price of the CFD falls accordingly. All CFDs fall into a category known as speculative trading. You don't actually buy the asset, neither do you take possession of the asset. You're simply trading a contract that mirrors the price movements of the asset.

Xtrade Australia offers CFD trading across thousands of financial instruments. These encompass CFD Shares, CFD ETFs, CFD Commodities, CFD Cryptocurrency, CFD Forex, and CFD Bonds. You are welcome to trade your choice of CFDs at your leisure. Many traders include CFDs in their portfolio of financial instruments, as part of an effective diversification strategy.

NOTE: With CFD trading, you are always trading the Contract for Difference, and never trading the actual underlying financial instrument. If the CFD that you are trading is linked to a spot price, or a futures contract, there may be expiry dates in effect.




The Benefits of Trading CFDs at Xtrade Australia

As a newcomer to the trading scene, you know that it's possible to generate profits when financial instruments appreciate in price. You buy low and you sell high. The difference between the buy price and the sell price (less costs, charges, fees, commissions) is your profit. As an investor, your strategy is to buy and hold, allowing for long-term price appreciation. But, as a trader, prices don't need to rise for profits to be generated. When you trade derivative instruments like CFDs, it is possible to profit in rising and falling markets.

All CFDs are speculative instruments. Traders use technical and fundamental analysis to determine whether asset prices will rise or fall over the short-term. If you are optimistic (bullish) about the price of the assets in question, you BUY the CFD. If on the other hand, you are pessimistic (bearish) about the short-term price movement of the asset, you SELL the CFD.

Risk Disclaimer: CFD trading is inherently risky, and not suitable for all types of traders

Caveat: It is important to understand that traders are liable for the full value of the trade, not simply the margin requirement.



Bullish Expectations – Buying CFDs

Let's take a look at a few examples of how CFDs work. We begin our analysis with a standard example of buy low sell high.




In the example above, a CFD trader buys at point A, and sell at point B. The price movement from A to B multiplied by the contract size represents the gross profit. Once you subtract the trading fees, commissions, charges, or interest on the CFD, you're left with the net profit. CFDs have terms, but technically they never expire. It becomes very expensive to hold on to a CFD over the long-term, given the rollover fees, charges, spread, commissions et cetera. These are invariably traded as short-term financial instruments. Remember, it can certainly happen that the sell price is lower than the buy price, resulting in a loss of capital.

* CFDs are inherently risky and losses can result. Most traders lose money with CFD trading.

If the sell price of a CFD is less than the buy price, and you decide to go LONG on the CFD, you will finish in the red. The figure below indicates losses from a CFD trade when the sell price is less than the buy price, and you decide to buy the CFD.





Bearish Expectations – Short-Selling CFDs

Traders can also short-sell CFDs. This is possible with CFD Commodities, CFD Indices, CFD Forex, CFD ETFs, CFD Bonds, and CFD Cryptocurrency too. In fact, any financial instrument available in derivatives format can be shorted. Xtrade Australia facilitates short-selling of multiple assets. Provided the future price is less than the immediate price at which the CFD is sold, you will finish in the black. In this scenario, the difference between the price at which you buy back the CFD in the future, and the price at which you sell it in the present is the profit.





The diagram above indicates how a short-seller generates a profit by selling the CFD at point A, and buying it back later at a lower price at point B. Once trading fees and costs have been deducted, the rest is profit for the trader. Take note that these examples represent favourable outcomes for traders, but losses are entirely possible when you trade CFDs. This scenario is represented in the example shown below where the price of the CFD actually rises in the short-term and the trader had bearish expectations.




As you can see, the trader borrowed a specific amount of CFDs from the broker and sold them immediately at point A. At a later stage, the price of the CFD rose unexpectedly to B. When the trader bought back the CFD, the difference between the prices represents the loss incurred by the trader.



What Types of CFDs are Available at Xtrade Australia?


We are proud to offer you thousands of financial instruments in a CFD format. Our list of available CFD options includes:

  • CFD Bonds – US 5Y-T-Note, US 10Y T-Note, 10Y Euro Bund, Gilt Long Government, and US 30Y T-Note.
  • CFD Commodities – Cocoa, Heating Oil, Gasoline, Brent Oil, Soybean, Natural Gas, Copper, Cotton, Coffee, Sugar, Wheat, and Palladium.
  • CFD Shares – Virgin Galactic, Spotify, Teva Pharmaceutical, Salesforce.com, Medtronic, Ford Motor, AIG, Visa, Snap, JP Morgan, Microsoft, Coca-Cola, Walt Disney, Pfizer, Bank of America Corporation, Comcast Corporation, eBay.
  • CFD ETFs – Direxion Small Cap Bear, S&P500, MSCI Brazil, UltraShort USO-Oil Fund.
  • CFD Indices – USA 30, USA 500, Russell 2000, US Dollar Index, and US-Tech 100.
  • CFD Forex – AUD/USD, EUR/GBP, CAD/CHF, USD/CAD, GBP/JPY, CAD/JPY, NZD/USD, EUR/AUD, GBP/AUD, EUR/CHF, EUR/NZD.

Take note that within each category of CFDs (bonds, commodities, shares, ETFs, indices, forex) are scores of assets available for trading purposes. At Xtrade Australia, registered traders are privy to competitive spreads and no commissions. We keep costs low by not charging deposit/withdrawal fees. However, if your CFDs are rolled over (kept open after 10 PM GMT) premiums will be charged to your account.

list of premium sell and buy charges for each of the CFD products we offer


Introducing Leverage and Margin for CFD Trading

All traders are on a budget. Some of us have a big budget, while others have a small budget. Luckily, you don't have to invest all of your capital in a concentrated selection of financial instruments. That's because leverage magnifies the trading power of your capital. With leverage, every Australian dollar has enhanced trading potential. With CFD products, different categories have different amounts of leverage.

Consider the following leverage on different financial instruments for Xtrade Australia:

  • 2:1 for CFDs referencing crypto-assets.
  • 5:1 for CFDs referencing shares or other assets.
  • 10:1 for CFDs referencing a commodity (other than gold) or a minor stock market index.
  • 20:1 for CFDs referencing an exchange rate for a minor currency pair, gold or a major stock market index.
  • 30:1 leverage for CFDs referencing an exchange rate for a major currency pair.

Aussie traders are encouraged to conduct the necessary research into the leverage requirements of different financial instruments. That will tell you how to budget for your trades and diversify your portfolio. Since different instruments have different capital requirements, it’s always a good idea to put a trading plan into practice with Xtrade Australia. With the multiplier effect of leverage, you can increase your profits, or magnify your losses. Use leverage judiciously when trading CFDs. Contrary to opinion, it is not simply the margin amounts that you are liable for when trades move against you; it's the full value of the trade.

Sometimes, brokers may initiate what is known as a margin call. This means that additional capital will have to be withdrawn to keep a CFD position. If there is insufficient capital in your account, the CFD position may be closed out. Any losses that result will be yours to bear. Margin is closely linked to leverage. Margin is simply the leverage ratio expressed as a percentage. If leverage of up to 5:1 is available, that means you have a 20% margin requirement. If the leverage is 10:1, that means you have a 10% margin requirement, and if leverage is 30:1, then your margin requirement is approximately 3.3%. The higher the leverage, the lower the margin. This has its pros and cons, since magnified profits and losses can result.



The Pros and Cons of CFD Trading


Pros


  • Demo Trading Options
  • Low Margin Requirement
  • Hedge Against Market Volatility
  • Leverage Can Magnify Your Profits
  • CFDs Are Used for Portfolio Diversification
  • No Inflation-Related Risks with CFD Trading
  • Generate Profits in Rising and Falling Markets
  • Hedge Against Poorly Performing Physical Investments

Cons


  • High-Risk Options
  • Margin Calls Can Result
  • Expensive to Roll over CFDs
  • Volatile Speculative Financial Instruments
  • Can Incur Losses Larger Than Your Deposits


CFDs are better suited to short-term trading, since there are many fees to consider when rolling over CFDs from day-to-day. Experts recommend holding a CFD for 1 – 7 days, and while they don't expire, the costs quickly spiral out of control. With CFDs, any open positions in your account will be subject to daily rollover fees a.k.a. premiums, which can negatively affect your profitability. The holding rates and your specific trades will determine the fees you are subject too.

All brokers generate their profits from the spread. This is the difference between the buy price and the sell price of a CFD. Brokers also charge other fees to their clients, notably finance charges, hedging charges, interest rates, and the like. If a trade moves against you, the margin amount can be forfeited to the broker.



Top Tips for Trading CFDs at Xtrade Australia

CFD trading is risky. Speculation is involved with these short-term financial instruments. Despite the risks, there are ways to enhance your knowledge and understanding of the financial markets. At Xtrade Australia, we provide you with a full suite of educational tools and resources. These include charts and graphs, access to financial analysis, and economic news, to make more informed trading decisions.

It's important to lay out your plans when trading CFDs. Budget allotments must be made for specific financial instruments. That way, you can avoid the pitfalls of asset concentration. CFDs allow for diversification by spreading your capital across multiple asset categories. The more detailed your understanding of the financial markets, the less you have to rely on emotionally-based trading decisions. Research, selection and timing are key to better trading outcomes. While nothing is guaranteed in the financial markets, informed traders tend to generate more favourable results.

Learn to use the trading platforms available at Xtrade. Our premier platform is WebTrader which offers powerful resources for trading CFDs. WebTrader runs directly off your browser, no download needed. Enjoy access to real-time market prices with thousands of financial instruments. While you are learning the ropes, use demo trading accounts to practice your trades. That way, there is zero risk of loss and maximum experience gain. These top tips for trading CFDs will serve you well, now and in the future.

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Trading CFDs involves significant risk of loss. Trading FX/CFDs involves a significant level of risk and you may lose all of your invested capital. Please ensure that you understand the risks involved.