Trading with CFDs – How to trade with them?

CFDs or Contract for Difference are a type of investment instrument that offers us a series of advantages over other types of investments. Apart from being able to trade assets up or down without acquiring the underlying asset, it also allows us to expose ourselves to it with a fraction of our capital. In this way, we can expose ourselves to potential profits, but also to potential losses if we use it without knowledge. That is why today we are going to teach you what CFDs are and how they work.

What are CFDs (Contracts for Difference).

A CFD or Contract for Difference is a type of investment that consists of two parties agreeing exchange the difference between the entry and exit price of an underlying asset on which said contract is established. This investment modality allows us to take advantage of price variations of a wide variety of assets, such as stocks, indices, raw materials, cryptocurrencies and others without the need to acquire the underlying asset. Trading with CFDs has been booming since it also allows us generate profits in bear markets betting short against assets.

How CFDs work.

Just like we explained previously On the futures markets, CFD contracts work in a similar way. He Trading with CFDs It is based on the purchase/sale of a Contract for Difference. The profit or loss of the CFD is given in the difference between the position entry price and the position closing price. Depending on the position taken, we will close with a profit or loss if the price of the asset rises or falls. For this it is very important to take into account the purchase and sale price. As in other financial markets, there are two prices in CFDs:

• The purchase price (ask)
• The sale price (bid).

The difference between the prices is known as spread. It is the price that the broker charges for each operation. It is added to the purchase price when opening a position. The bid price is always slightly lower than the current market price, and the ask price is slightly higher than it.

In the case of a purchase operation with CFDs, the ask (purchase) price is taken as a reference and it is closed with the bid (sale) price. On the contrary, in a sale operation a contract will be taken as a reference at the sale price (bid) and closed at the purchase price (ask).

Where to trade CFDs (Forex, stocks, stock indices, cryptocurrencies).

We have a wide variety of brokers where you can trade CFD contracts, but You have to be cautious when choosing the broker which we are going to use for a series of reasons:

• It is important that the broker is regulated to have guarantees when operating. By regulation we mean qualified regulatory bodies, not the typical regulatory licenses from tax havens or those with few guarantees.
• It is essential that the broker has liquidity to enable fluidity of operations on the platform and at the same time the spread is quite tight. This issue is very important, given that an illiquid broker could manipulate prices and in turn it would offer us very high spreads (abysmal difference between purchase and sale price).
• Customer service with physical headquarters in our region. At the same time, if they speak our language, the better to facilitate the resolution of any doubt or problem that may arise
• A wide variety of assets to trade through CFDs. There may be brokers specialized in trading certain asset classes, although that is more to personal taste.

Within these options we can highlight XTB, which has regulations from different regulatory bodies, great liquidity, good customer service and support for problem resolution, a wide variety of assets and, additionally, allows us to operate with a demo account to put put our trading skills into practice without risking our capital.

Advantages and disadvantages of trading CFDs.

CFD trading has both its advantages and disadvantages, which we must take into account before starting to invest. Among the advantages of CFD trading we can highlight:

• It allows us to bet for or against an asset, which helps us mitigate losses in bearish periods (as long as we know how to invest with the trend).
• La wide variety of assets present in CFDs open up endless possibilities for us to be able to invest in markets that we, as capable retail investors, would not be able to address.
• It has its tax benefits, since when trading CFDs we do not have to pay transfer tax, since we are trading derivative instruments, not the underlying asset.
• Thanks to financial leverage, we can gain exposure to an asset at a fraction of its value. This allows access to assets that we would not normally be able to access. As we mentioned previously, every benefit carries its risks, given that leveraged operations are a double-edged sword. Just as with its use we can generate a potential benefit, We can also expose ourselves to potential loss. That is why we must know how these investment instruments work in order to protect our capital.

object lesson trading with CFDs.

Let's give a practical example on how to trade CFDs. The first thing we have to do is analyze the asset from the technical aspect to see if it is heading up or down. When we have carried out the corresponding analysis, we go to the negotiation tab. This is where we are going to define the parameters of our operation. We can choose for the operation to be carried out at the market (current price) or define the entry price (through limit or stop orders). We must look at the current spread of the asset that we are going to negotiate, in our case we see that the spread is 47,7. It is broad but it is because we are dealing in cryptocurrencies. Below we establish our stop loss and stop profit orders.

When we already have the order in execution, we only have to wait for our operation to reach the level of our profit closing order. In case we continue the operation and it is in profits, we can raise the stop loss order to ensure profits in case the price drops back to our entry price (known as "breakeven«). If we want to close the operation at market price, we just have to press the button that will be present in our broker, where a message will appear warning us of the parameters with which the operation will be closed. This is important given that the market can fluctuate very quickly, which can also affect our profits or losses in a matter of seconds.