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CFDs - What are Contract For Differences and How to Trade Them

 

What is a CFD

CFD stands for Contract For Difference, this is a financial instrument or a contract used to trade in commodities such as Gold, Oil, Natural Gas, Cocoa, Coffee without necessarily having these commodity items in your stock. This is an agreement between a buyer and a seller stating that 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 two 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.

 

Similarities in the profit methods, there are two ways to profit from CFDs through fluctuation of these instruments, this is the same method that applies in Forex


Buy the Contract for Difference when it is low and then sell it when it is high
Sell the Contract for Difference when it is high and then buy it when it is low

 

What are CFD specifications?

CFD specifications vary from one broker to another, because these instruments are Over The Counter Market Instruments. Some brokers may implement the minimum lot size to be 1,000 other may implement it to be 100. These Type of unique specifications are determined by the broker and differ from one broker to the other.

Another aspect is because there is CFDs for metals, for Currencies, for stocks and Indices each of these types will have different contract specifications which will be provided by the broker. These details and characteristics of these financial instruments are 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 exactly is Profit Made from CFD? Who makes the profit, is it by the Buyer or the Seller?

If the price of the underlying commodity rises after the contract start time, the buyer gets a positive difference on price - paid by the seller

If the price of the underlying commodity reduces after the contract start time, the seller gets a positive difference on price - paid by the buyer

 

When should a Trader buy or Sell a CFD?

When a trader determines the price of the underlying commodity will rise, then the trader should buy, if the trader determines the price will fall, then the trader should sell.

 

How is profit calculated?

The Profit that is made from CFDs is calculated based on the price difference between the time of opening the transaction ant the time of closing the transaction.

 

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 hours 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 technical 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 Forex platforms. These financial instruments are used by traders wanting to diversify their investment options as well as 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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