Trading CFDs.

Continuing our discussion on trading CFDs from yesterday.

The choice you make here will reflect your view of the direction in which you expect the price of the underlying asset will move.

This means that:

• A long position means entering into a CFD contract expecting the price of the underlying asset will INCREASE in value.   (“I bet the price will go up from here.”)
• A short position means entering into a CFD contract expecting the price of the underlying asset will DECREASE in value.  (“I bet the price will go down from here.”)

In order to close the trade, you will do the opposite of the opening trade.

In both cases, when you close your CFD position you will have a profit or loss.

Your profit or loss is the difference between the closing price and the opening price of your CFD position.

The extent of the profit or loss will represent this difference multiplied by the size (number of units) of the position you traded.

(Plus any fees and other costs such as interest charges on positions held overnight).

As its name suggests, a CFD is a contract between two parties to exchange the difference in the price of an underlying asset.

And this is between the time at which we open a contract and the time at which it is closed.

• If the asset rises in price, the buyer receives cash from the seller.
• If the asset falls in price, the seller pays cash to the buyer.

Example 1

For example, if you think GBP/JPY is going to fall in price, you would sell a CFD on GBP/JPY.

You’ll still exchange the difference in price between when your position is opened and when it is closed.  But will earn a profit if GBP/JPY drops in price and a loss if GBP/JPY increases in price.

They settled CFDs with cash, but the notional amount is never physically exchanged.

The only cash that actually switches hands is the difference between the price of the underlying asset when the CFD is opened and when the CFD is closed.

The difference between the open and closing trade prices is cash-settled in the denomination that your account is in.

There is no delivery of physical assets.

Example 2

For example, when you close a CFD position involving EUR/USD, there are no actual euros or dollars physically exchanged.

With CFDs, you are basically betting on whether the price of the underlying asset is going to rise or fall in the future.  That is compared to the price when the CFD contract is opened.

In the U.S., CFDs are banned.

So U.S. retail forex traders trade a product known as “rolling spot FX contracts“.

From a technical standpoint, they’re considered different from CFDs, but from a functional standpoint, they are the same.

Both are cash-settled contracts in a particular currency pair that gives you exposure to changes in the price for that currency pair.

When the contract is closed you will receive or pay the difference between the closing price and the opening price of the contract.

Both allow you to obtain indirect exposure to the underlying asset (currency pairs), which means that you will never actually own the underlying currencies.

But you may gain profit or suffer loss as a result of price movements in the underlying asset as if you had actually owned it.

CFDs are referred to as “over-the-counter” (OTC) derivatives.

This is because they are traded directly between two parties rather than on a central exchange.

The two parties involved are YOU and your BROKER.

Instead of buying or selling physical currencies, you are trading CFDs.

This is a contract that enables you to speculate on whether the price of a currency pair will rise or fall.

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