CFD Trading with XTB. Table of Contents

Everything-you-need-to-know-about-CFD-trading-with-XTB

What is CFD?

The term CFD stands for contract for difference.

CFD trading allows you to open a position in the value of an instrument and speculate whether it will rise or fall.

It is essential to remember that since we are talking about a derivative product, you do not own the asset directly.

This saves you physical operating costs such as UK Stamp Duty, and what you are simply doing is trading by fluctuating and moving prices.

The contract itself is an agreement between two parties to exchange the difference between the opening price and the closing price of the asset, this is the reason why it is called “ contract for difference ”.

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CFD Explained For Beginners

Unlike the classic ways of trading, CFDs offer the ability to profit in both falling and rising markets.

buy and sell for CFD trading

If you think the price of an instrument will go up, it will go long or “buy” and your profit will grow with each increase in price.

If you think that the price of an asset will fall, you will go short or “sell” and your profit will grow with each fall in price.

Clearly, if the market does not move in the direction you anticipate, you will suffer losses.

you can place buy or sell orders in CFD markets at anytime

If you consider, for example, that the price of Apple’s stock will fall, you will take a short position in Apple’s stock and your earnings will increase with each point that the price falls below the opening price.

On the other hand, if Apple’s share price rises, you will suffer a loss for every point the price rises.

The volume of profit or loss will be determined by position size (lot size) and market price fluctuation, which is explained in detail here.

The ability to go long or short in keeping with the reality that CFDs are a leveraged product makes this one of the most flexible and popular avenues of short-term trading in financial markets today.

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How “Leverage” helps CFD trading

CFDs are a leveraged product.

This means that you gain much larger market exposure for a relatively small initial deposit, which means that your return on equity is significantly higher than in other operations.

In classic trading, you would have to pay your broker the full value of the asset you want to trade – but with CFDs, you are only required to award a fraction of the same trade, therefore you can make your investment amount much higher.

Let’s say you want to position yourself with 10,000 Barclays shares and the share price is 280p, which means that the total investment would cost you £ 28,000 – regardless of the commission or other fees, your broker would charge you for the transaction.

With CFDs, however, you need no more than a small percentage of the total trade value to open the position and maintain the same level.

At XTB, we give you 10: 1 (or 10%) leverage on Barclays shares, so you would only have to have an initial deposit of £ 2,800 to trade the same amount.

If Barclays shares grow 10% to 308p, the position value is now £ 30,800.

So by initially depositing just £ 2,800, this CFD trade has generated a profit of £ 2,800, which is a 100% return on investment, compared to just 10% if the shares were physically purchased.

The important thing to remember about leverage is that while you can maximize your potential gains, you can also magnify your potential losses in the same way.

Therefore, if prices fluctuate against you, your losses could exceed your initial deposit, so understanding how to manage your risk is critical.

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Which financial market you can trade through CFDs?

We provide contracts for difference in more than 700 international markets and multiple asset classes, all with the ability to be leveraged and bought or sold:

  • Forex
  • Stock Indices
  • Shares
  • Commodities
  • ETFs

So to summarize the features of CFD markets:

  • The term CFD comes from “contracts for difference”.
  • The CFD offers you to position yourself in any value of a financial market – for example, stocks, commodities, currency pairs, or indices – either up or down, and in the short, medium or long term.
  • If you consider that the price of a market is going to rise, you buy or “get long”, and you will be benefited from each price increase.
  • If you consider that the price of an asset is going to go down, you sell or “go short”, and you will benefit from each drop in price. However, if the price moves in the opposite direction, you will suffer losses.
  • With CFDs, the underlying asset does not belong to you – you simply speculate on its price movements. Therefore there is no physical cost of operation as with the UK stamp duty.
  • CFDs are a leveraged product, which means that a small capital deposit is required in order to gain much greater market exposure.

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Example of CFD Trading

Suppose you think the UK 100 index is going to rise in price thanks to some positive UK corporate earnings, and you want to open a trade to take advantage of any upward movement in prices.

You log into XTB’s award-winning platform, xStation, and see that the latest UK 100 price is 6650.

The trade: So you decide to go long and buy 1 lot of UK 100 at 6650.

At a trade size of 1 lot, for every UK 100 pip that rises above 6650, you will make a net profit of 10 pounds.

The result: Perfect! Your hunch turns out to be true and quickly the UK 100 has had a stock market rally at a price of 6700, a rise of 50 pips, so you decide to close the trade.

This gives you a net profit of £ 500 (50 pips x £ 10).

Of course, if prices had dropped to 6600 points, you would have lost £ 500.

The thing to remember about leverage is that while it can significantly increase your profits, it can also magnify your losses in the same way.

Therefore, if prices move against you, your losses may exceed your initial deposit – so it is important that you learn to manage risk.

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How to trade CFDs with XTB?

Now that we’ve covered the basics, let’s take a closer look at how CFD trading works.

Here, we will explain the characteristics of a winning trade as well as a losing trade.

Suppose you think that the value of the FTSE 100 (the largest UK companies) will grow more than expected.

In XTB, the FTSE 100 is called UK 100

You go long on the UK 100 at 6700, which is 0.5% (200: 1) spread.

example of CFD trading in a table

As you can see, in this particular example opening a UK 100 contract with one lot equals £ 10 profit for every point the UK 100 moves in your direction.

The xStation’s advanced calculator automatically determines how much profit or loss you are taking depending on your stop loss, lot size, and pending order, giving you the ability to make instant and informed decisions.

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What is lot (trading volume)?

A lot is the size of your trade and the face value of a lot varies by instrument.

For example, a lot in a forex trade corresponds to 100,000 of the base currency, while a lot in the US 30 (Dow Jones) is $ 20 per point.

So make sure you understand what a lot equates to before you start trading.

You can find the specification of nominal values ​​per lot for all market instruments on the instrument specification page.

What is spread (trading cost)?

When you trade CFDs, you will appreciate that there are two prices available.

One is the sale price or “bid” and the other is the purchase price or “ask”.

The spread is the difference between these two entities.

The smaller the difference the lower the transaction cost and the faster you can generate profit from your trades.

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