Contract for Difference (CFD) is a type of trading where the trader enters into a contract with a broker. So, it relies on the difference between the price at the beginning of the contract and the price when the contract is exited.
If the trader makes a profit, the broker pays the difference between the initial price and the price at the end. If the trader incurs a loss, he/she will pay the difference to the seller (the broker).
What are the steps involved in trading?
Here is an outline of the steps that you will follow when you enter into a CFD trade:
- Download MetaTrader 4 (MT4) trading platform
- Choose a market
- Decide to either buy or sell
- Select your trade size
- Add a stop loss
- Monitor and close your trade
Explaining the steps involved in trading CFDs
Find a reliable trading platform – MT4
The first step is a preliminary one that sets the stage for effective trading of CFDs. You need to find a reliable trading platform that will make your work easier. MT4 is the ideal trading platform that you can use to trade CFDs. This is because it has all the features that will enhance your trading experience and protect you from unnecessary losses. You can easily find an MT4 download for PC and begin your CFDs trading.
Choose a market
You need to choose the market that you want to trade in. The scope of the market includes shares, commodities, indices, currencies, bonds, and interest rates. If you have a reliable broker, the market can be global, giving you access to huge financial opportunities. However, you will need to research the market in which you are just about to enter into a contract. MT4 has a search function that helps you to know more about the market.
Decide to buy or sell
The next step is to decide whether you going to buy (go long) or sell (go short). The difference between the ‘sell price’ and the ‘buy price’ is called a spread. If you think that the market price of your underlying instrument will go up, you go long (buy) or go short (sell) if you think the price will go down.
Select your trade size
You now need to select the number of CFDs that you would like to trade. When trading equities, the value of 1 CFD is equal to 1 share. However, the value of 1 CFD may vary based on the instrument if you are trading forex, indices, commodities, or interest rates. Again, you can use the MT4 platform to check the value of your CFDs before you start trading.
Add Stop and limit orders
One of the most important things that you should remember when trading CFDs is to add a Stop Loss order, which instructs your platform to close a position when it reaches a level that you have set. This feature is available on the MT4 platform.
Monitor and close your trade
Finally, you should monitor and close your trade.