Guide to Understanding CFD Trading

By Gergios Vergakis - on January 31, 2016

How does CFD work in principle, and why is the trading so much more beneficial as opposed to trading through Futures or Options, or the spot market itself?

How Does CFD Work in Real Life?

Many traders may not actually know how does CFD work in real life, but CFD contracts or Contracts For Difference as their acronym means, are a very efficient way for trading the financial markets. Some traders know what is CFD trading, but only on the surface, and only because some vendor or broker advertised CFDs for their high and affordable leverage. But deep down, CFD trading platforms offer unparalleled advantages over the spot market, and even more over Futures and Options trading. For stock traders for example, CFDs bypass all short selling restrictions, at all times, and allow stock traders to short stocks for unlimited protection without any restrictions, that is critically important some times. CFDs offer unique linear pricing, one way liquidity and trading performance which works like magic, for trading up to $100 per point. On the other hand Futures are not linear, and cannot be use for accurate hedging trades. And then, there are Options, which are ultra complicated, most of the time are not linear at all, and their pricing follows pricing models which are too complicated. And though Options are good for some advanced trading, they are simply useless for day to day trading, because it take a massive market movement for the trade in question to just break even. CFDs are linear, the trader stand to make a profit as soon as the market moves in their favour, no ifs and no buts. Even some highly skilled and proficient Option traders use hybrid trading techniques today, combining both Options and CFDs, because CFDs provide the flexibility and linearity that Options themselves fail to provide.

How Does CFD Work
CFD traders are at a tremendous advantage over Futures and Spot market traders. And many of them don’t even know it until they see how backward trading is in those other instruments.

 

How Does CFD Work Really

All traders who use CFDs, know how does CFD work in real life. CFD trading is all about trading the difference in price, in the underlying market, over a period of time where that price has changed. But because no physical trading takes place in regards with the underlying market at that very time, it results in one way liquidity. Where the trader has perfect access to the open market, through the collective CFD brokerage industry. But the adverse volatility waves of the open market cannot create problems to the CFD trader, because they are protected by the very nature of these instruments. CFD trading is very reliable, and has become the real market. Especially in the case of stock trading, the CFD market is more stable and more dependable than the spot stock market itself. And that’s why one can short stocks through CFDs even when stock exchanges impose short selling restrictions, which is truly amazing. Reliable trading goes beyond short selling, and is an everyday reality throughout the year, all because of the good and fast way that brokers handle trades.

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