CFD means ‘Contract for difference,’ and it’s a contract where a trader and a CFD broker exchange the difference between an asset’s buying and selling price. Crypto CFD trading enables investors to earn profits through price movements of assets, which they don’t own. Buyers and sellers calculate profits through price differences between when they open contracts and when they exit them.
CFD brokers are the link between traders and the financial market. They provide platforms to facilitate trading, and investors use these platforms to access the market. CFDs have grown popular over the years due to the opportunity to go long or short on assets and profit from price differences without buying the security. Interested parties can speculate on various securities or derivatives with CFD platforms, bringing a potential win or loss. When assets gain value, holders can choose to sell them and profit from the difference.
How Does Crypto CFD Trading Work?
Traders speculate on various assets by predicting a price growth or decline on numerous assets. For example, traders can predict a price growth on gold, and if gold eventually gains value, they would profit on the new price difference. On the other hand, buyers can also go short on assets and profit from the asset if it falls. Going short means that a trader predicts a price fall and sells the asset to buy at a lower price.
It’s safe to note that CFDs allow leveraging, enabling traders to control the full position of an asset even if they have not paid the total cost. This is quite different from traditional financial markets like the stock exchange, where you need to pay the total price of an asset to control the full position. Leveraging allow investors to diversify investments and potentially earn more when profits come to play.
Possible losses are also calculated using the total position for leveraging, which means that you could have losses higher than your total deposit, depending on your leverage. Let’s say a trader leveraged on USD 300 of Bitcoin and has only paid 5% of the total cost – when profits and losses come to play, it can lead to a large margin for either profit and loss. This is why leveraging is advised for only professional and experienced traders to prevent substantial losses.
How To Trade With CFDs
The first step to start CFD trading is choosing the market you want to trade on. Some of the markets include commodities, indices, currencies and many others. After choosing your market, the next step is deciding to go long or short. This process needs a lot of research and other trading tools to help weigh the possibility of price growth or decline.
The difference between the price you are buying and selling is the spread, and this step usually determines if you would make profits or not. Selecting your trade size is determined by the instrument you are trading, and you can also decide to leverage and control a position higher than your deposit. When leveraging, all you need is a margin; a margin is a price you need to pay before controlling a full position.
After creating a position, adding a stop loss would help traders control losses when the price difference is not what they speculated on. Although this step is not compulsory, it allows traders to monitor price movements, leading to significant losses. When you want to end the trade, you can easily close your trade. CFDs are not available for some countries, and it’s crucial to know your country’s stance on the instrument before initiating a trade.
