CFD Trading
Introduction to CFD Trading
CFD is short for Contracts for Difference. The official
definition is that a Contract for Difference (CFD) is an agreement between two parties to exchange the difference between the opening price and the
closing price of the contract, at the close of the contract, multiplied by the number of units of the underlying commodity specified within the contract.
One of the major benefit of trading a CFD is the fact that margin trading is available to the client. Contracts for difference trading means
clients can trade commodities without having to tie up large amounts of capital. Clients should just put up deposit, the initial margin trading requirement
(4-15 percents of the underlying contract value). This margin guarantees that clients will be able to cover their losses (if any) that may result from their trades.
Clients should realize that margin trading dramatically increases potential profits as well as risks.
CFD Advantages
CFD is one of the most attractive instruments available to investors with small or medium size deposits. The most important advantages of CFDs are:
- low level of the initial deposit;
- low commission rates;
- elimination of the underlying commodities physical delivery risks;
- leverage;
- immediate dealing.
Commodity markets are very volatile and give an excellent opportunity for CFD traders to make profit out of commodity price movements.
CFDs introduce significant flexibility to trading and open up a host of trading techniques. We shall list the most basic ones:
Long Term Trading
This is the most straightforward strategy. A long CFD will profit from an upward price movement in the underlying share.
Short Term Trading
Going short is a simple strategy and one of the principal attractions of CFD and margin trading. By entering into a short CFD position a profit will
be seen if the price of the underlying commodity falls. There are no limits for holding short or long positions as long as the trader will rollover his/her positions from
one active month to another.
Pairs Trading
This involves short selling contract and simultaneously buying another contract usually in the same sector (for example selling corn and buying wheat). This strategy
is also called “spread” and allows to lower the trading risks.
Market Hedges
Control your capital gains exposure, by short selling Equity Indices CFDs against your existing share portfolio, enabling to choose time you realize your profits.
CFD as a training tool
Trading CFD is one of the most effective training tools. It should be mentioned that demo-accounts are not very effective and may be even dangerous, because the
trader is getting used to managing large amounts of “virtual” money and loses the sense of risk. As we said hereinbefore CFD trading is available for
small deposit investors, therefore allowing to use CFD trading as training tool (but with real money instead of “demo” virtual money) before going to
the futures markets.
FIBO Group provides CFDs for the following contracts: Equity Indices, Corn, Wheat, Crude Oil and Gold. In order to view CFD specifications click here.
CFDs Examples
Mini Dow Jones
Trader bought 1 mini Dow Jones CFD Contract at 10401 points. He has closed his long position at 10720 points. His net profit is (10720 – 10401)*5 – 12 (commissions) = 1583 USD.
Wheat
Trader bought 1 Wheat CFD Contract at 320.25 cents and sold it at 322.5 cents. His profit is (322.50 – 320.25)*50 – 12 (commissions) = 100.5 USD.
Long position
Investor decides to buy December wheat (market is 315.75/316) and goes long 5 contracts at 316.
- Entry level - 316 cents;
- Number of contracts – 5;
- Value of 5 wheat contracts- $79000 (3.16*5*5000);
- Commission - $30 ($6/side for each contract);
- Initial margin - $4000 (800*5);
- Investor uses $4000 to control contracts worth of $79000.
Long position liquidation
In 5 days the wheat market is 325/325.25 and investor decides to close the position at market.
- Exit level - 325 cents;
- Number of contracts – 5;
- Value of 5 wheat contracts - $81250 (3.25*5*5000);
- Commission - $30 ($6/side for each contract);
- Gross profit - $2250;
- Net profit - $2190 ;
- Rate of return on Initial Capital- 54%.
Short position
Investor assumes that the wheat will go down and decides to sell 5 contracts at 333 cents per bushel.
- Entry level - 333 cents;
- Number of contracts – 5;
- Value of 5 wheat contracts - $83250 (3.33*5*5000);
- Commission - $30 ($6/side for each contract);
- Initial margin - $4000 (800*5);
- Investor uses $4000 to control contracts worth of $83250.
Short position liquidation
In 5 days the wheat market is 322/323 and investor decides to close the position at market.
- Exit level - 323 cents;
- Number of contracts – 5;
- Value of 5 wheat contracts - $80750 (3.23*5*5000);
- Commission - $30 ($6/side for each contract);
- Gross profit - $2500;
- Net profit - $2440;
- Rate of return on Initial Capital - 60%.
