Trade Forex Trading

CFDs - What are Contract for Differences & How to Trade Them

What is CFD

CFD stands for Contract for Difference, this is a financial instrument or a contract used to trade & transact in commodities like XAUUSD, Oil, Natural Gas, Cocoa, Coffee without necessarily you having these commodities on your stock. This is an agreement between a buyer and a seller stating one party will pay the other party the difference between the current price and the price at the time of contract.

What are the Similarities between CFD and Forex

The similarities that exist between these 2 financial instruments are:

  1. Both the Forex and CFD markets, profits are made from speculation and traders seek to make a profit from the quote difference of the commodity price for CFD and exchange rate in Forex.
  2. Both are Leveraged, and are traded on margin.

Even though the ways to make money are similar, there are two methods for earning money from CFDs through their price changes, which is the same as with FOREX.

Buy a Contract for Difference (CFD) when prices are low and sell when prices are high, or vice versa, sell at high prices and buy back at low prices.

What are CFD specifications?

CFD details are different at each broker, because these are traded directly between two parties. Some brokers might set the smallest trade size at 1,000, while others might set it at 100. The broker decides these unique details, and they are not the same for every broker.

Furthermore, due to the availability of CFDs spanning metals, Currencies, equities, and Indices, each instrument category will possess specific contract terms furnished by the broker. These detailed particulars and defining characteristics of these financial trading instruments are collectively known as CFD Specifications.

What are Some Example CFDs?

CFD on Commodities

Brent Crude Oil - BRN, Light Sweet Crude Oil - CL, Natural Gas - NG

CFDs on Metals

Platinum - PL, Palladium - PA, Copper - HG, Gold - XAU, Silver - XAG

CFDs on Indices and Currencies

How is Profit Earned from CFD Transactions? Is the Profit Realized by the Buyer or the Seller?

If the commodity price climbs after the contract starts, the buyer gains from the price gap. The seller pays it.

If the value of the underlying commodity decreases after a contract begins, the seller benefits from the difference in price, which is paid by the buyer.

When should a Trader buy or Sell a CFD?

If a trader thinks the asset price will go up, they buy. If they expect it to drop, they sell.

How is profit calculated?

The money you gain from CFDs is figured out by looking at the price difference from when you started the trade and when you ended the trade.

What are The Lots for Trading CFDs

Lots for Contracts for Differences are determined from broker to broker, a lot may be 1000 or 100 determined in the specifications for a particular broker.

What are CFDs Trading Hours?

CFDs are traded the same hours as Forex, that is 24 hrs a day for 5 days per week.

About Contracts for Differences

Contracts for Differences are traded during the same hours as Forex. CFDs Specification will be listed on a brokers website. The same analysis used to trade the currency market can also be applied to these financial Instruments. Some brokers may implement a commission on top of spreads charged for these CFDs, it is best to check if your broker applies a commission on top of the spread charged for these Instruments.

CFD Instruments are becoming more popular and more brokers are starting to provide these instruments for trading on their platforms. These financial instruments are used by traders who want to diversify their investment options and also those looking for more options to trade in addition to the currencies. When there is no trend in the currency market traders may decide to look for a trend to trade from the CFD instruments.

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