CFD trading examples. Learn from actual CFD trade examples

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CFD & Indices Basics

WHAT ARE CFDs?

CFD stands for Contracts for Difference, with the difference being between where you enter a trade and where you exit. Simply put, when the position is closed, you’ll receive the profit or incur the loss on that difference.

If you have bought gold for $1600, you do not have an ounce of gold that you can hold, rather you bought a contract from AxiTrader that will increase in value if the Gold price increases. For example, when you trade a CFD you’re speculating on the movement of the price only, rather than traditional stocks where you purchase a physical asset. When combined with leverage, CFDs give you quick, cost-effective and flexible exposure to a host of global financial products.

WHY TRADE CFDS?

  • If you’re looking to invest in the price movements of instruments, rather than purchasing physical assets

To take advantage of swift fluctuations in the underlying instrument or security. This is popular with short-term investors looking to profit from intra-day and overnight movements in the market

To take advantage of leverage and spread capital across a range of different instruments rather than tie it up in a single investment (note: this approach can increase risk)

  • As a risk management tool to hedge exposure
  • EXAMPLE GOLD CFD TRADE

    The price of gold is measured by its weight. Therefore, the price shows how much it costs for one ounce of gold in US dollars. For example, if the gold (XAUUSD) price is $1600.00, it means an ounce of gold is traded at US$1600.00. Similarly, the price of silver is its price per ounce in USD. If the silver (XAGUSD) price is 28.00, it means that an ounce of silver is traded at US$28.00.

    If you have bought gold for $1600, you do not have an ounce of gold that you can hold, but you rather have the obligation to buy XAU at US$1600. When you close your position, you sell the XAU and close your exposure. If you sell it for $1605.00, you have made profit of $5 for every ounce (unit) of gold in your contract. The same concept applies to silver trading. If you have bought silver (XAGUSD) for $28.00 and sell at $28.50, you would have made a profit of $0.50 for every ounce of silver in your contract.

    INDEX FUTURES ROLLOVERS EXPLAINED

    AxiTrader’s Index contracts are based on the relevant futures exchange price. Futures contracts expire because they are related to a definitive date. There are many months traded and the forward prices can be higher or lower depending on market conditions.

    In order to remove final day volatility, at AxiTrader we switch from using the front month contract into the second month’s contract one trading day prior to the exchange expiry.

    An example of this is when the Australian SPI contract for March expires. The June price needs to be used and the price on the AxiTrader MT4 platform may increase or decrease depending on the value of the June contract relative to the March contract. This is obviously not a price rise or fall in the SPI but just a move to a new reference price, therefore no profit or loss will be incurred as a result.

    In order to ensure this does not affect our clients, a cash adjustment needs to be made. This is explained in the following examples:

    SPI March closes at 5050/5051 and SPI June opens at 5000/5001

    Your Position: 10 Buy contracts

    If your position is a Buy, it closes on the old Bid price of 5050 and reopens on the new Ask price of 5001. Because you are in a Buy and the new market price has decreased, your open trade P&L has made a loss. As a result you will receive a positive adjustment amount in your swap column equal to the difference of the old bid and the new ask.

    You will receive (5050-5001)*10 contracts = $490AUD

    Your Position: 10 Sell contracts

    If your position is a Sell, it closes on the old Ask price of 5051 and reopens on the new Bid price of 5000. Because you are in a Sell and the new market price has decreased, your open trade P&L has made a gain. As a result you will receive a negative adjustment amount in your swap column equal to the difference of the old ask and the new bid.

    You will receive (5051-5000)*10 contracts = -$510AUD

      Accounts will be cash adjusted on positions held at the following times:

    HSI Future – Close of business on the day 3rd to last business day of the contract month.

    CAC40 Future – Close of business on the day before the 3rd Friday of expiry month.

    DAX30 Future – Close of business on the day before the 3rd Friday of expiry month.

    S&P Future – Close of business on the Wednesday the week before the 3rd Friday of expiry month.

    FT100 Future – Close of business on the day before the 3rd Friday of expiry month.

    DJ30 Future – Close of business on the Wednesday the week before the 3rd Friday of expiry month.

  • SPI200 Future – Close of business one day before the 3rd Thursday of expiry month.
  • OIL ROLLOVER EXPLAINED

    AxiTrader’s oil contract (WTI) is based on the ICE futures price (Front-Spot Month). This futures price is the largest price benchmark for the global oil industry.

    Futures contracts expire because they are related to a definitive date. There are many months traded and the forward prices can be higher or lower depending on market conditions.

    In order to remove final day volatility, at AxiTrader we switch from using the front month contract into the second month’s contract one trading day prior to the exchange expiry.

    An example of this is when the WTI (West Texas Intermediate) contract for September expires. The October price needs to be used and the price on the AxiTrader MT4 platform may increase or decrease, depending on the value of the October contract relative to the September contract. This is obviously not a price rise or fall in oil but just a move to a new reference price and therefore no profit or loss will be incurred as a result.

    In order to ensure this does not affect our clients, a cash adjustment needs to be made. This is explained in the following examples:

    Example 1: Long position of 1000 barrels

    September Contract closes @ $110.00

    October Contract opens @ $111.38

    Cash adjustment of – $1,380 is made on account

    Profit of $1,380 is made on open position

    Net financial effect is zero.

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    Example 2: Short position of 2000 barrels

    September Contract closes @ $110.00

    October Contract opens @ $111.38

    Cash adjustment of +$2,760 is made on account

    Loss of $2,760 is incurred on open position

    Net financial effect is zero.

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    AxiTrader is a trading name of AxiTrader Limited (AxiTrader), which is incorporated in St Vincent and the Grenadines, number 25417 BC 2020 by the Registrar of International Business Companies, and registered by the Financial Services Authority, and whose address is Suite 305, Griffith Corporate Centre, PO Box 1510, Beachmont Kingstown, St Vincent and the Grenadines.

    AxiTrader is 100% owned by AxiCorp Financial Services Pty Ltd, a company incorporated in Australia (ACN 127 606 348). Over-the-counter derivatives are complex instruments and come with a high risk of losing substantially more than your initial investment rapidly due to leverage. You should consider whether you understand how over-the-counter derivatives work and whether you can afford to take the high level of risk to your capital. Investing in over-the-counter derivatives carries significant risks and is not suitable for all investors.

    When acquiring our derivative products you have no entitlement, right or obligation to the underlying financial asset. AxiTrader is not a financial adviser and all services are provided on an execution only basis. Information is of a general nature only and does not consider your financial objectives, needs or personal circumstances. Important legal documents in relation to our products and services are available on our website. You should read and understand these documents before applying for any AxiTrader products or services and obtain independent professional advice as necessary.

    AxiTrader Limited is a member of The Financial Commission, an international organization engaged in the resolution of disputes within the financial services industry in the Forex market.

    Currency & CFD Trading

    Most frequently asked questions

    Spread: When trading CFDs, you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favor before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.

    Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.

    We set a price for a contract based on the underlying market, which you can buy or sell.

    With each market, you are given a ‘buy’ and ‘sell’ price either side of the underlying market price. You can trade on the market to go up (known as ‘buying’ or ‘going long’), or you can trade on it to go down (known as ‘selling’ or ‘going short’).

    Once you open your trade, you’ll receive a confirmation message to show that it has been accepted. Trades are occasionally rejected, but the vast majority go through without any problems. Check the details on your confirmation message carefully to make sure the trade is as you intended.

    Your open trade will now appear in the ‘open positions’ pane in our trading platform. All the time, your position is open, you’ll be able to see your profit or loss by checking the profit/loss column.

    When you decide to close your position and collect your profits, to do this, you sell the same number of contracts as you bought initially.

    The simplest way of doing this is to bring up a ‘close position’ screen. When you click on ‘sell’, you’ll receive another confirmation to let you know that you’ve sold that number of contracts.

    Unlike some other forms of trading, when it comes to CFDs traders using the Fortrade platform, traders can hedge their trades, which can be beneficial when it comes to limiting potential losses.

    For example, let’s say that I currently have an open position on Dollar/Yen – I ‘went long’ buying the Dollar in the expectation that USD would strengthen against the Japanese currency. However, I’m now having second thoughts – not enough to make me want to close my trade, but sufficient doubt to make me slightly uncertain that my hoped-for currency strengthening will occur.

    In other forms of trading, I would have two choices; close the trade now or keep the deal open and cope with the uncertainty. However, with a CFD, I can simultaneously open another Dollar/Yen position in which I short the Dollar – going the opposite way to my first trade, which is still open. Traders should keep in mind that CFDs can only be hedged using the Fortrade platform.

    If the currency pair subsequently moves the other way to my original trade – with the Dollar falling against the Yen – I’ll still be able to salvage something from the situation, because my hedge will then take effect.

    If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.

    For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end, and the value of your physical shares starts to rise again.

    Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.


    CFD Trade Example

    So, how exactly does one trade a CFD? Let’s take a look at an example of a CFD trade using the popularly traded ‘Germany 30’ index as an example;

    In the following theoretical example, ‘Germany 30’ is currently trading at a level of 9610.5/9611.5, giving me the option of selling the German index at the 9610.5 level or buying at 9611.5. I decide to buy £5 of the ‘Germany 30’ at that 9611.5 level, and my nominal risk in this instance would be worked out as follows;

    (Level I’m buying at x the amount I’m buying)

    So, in this case, the nominal risk would be;

    9611.5 x 5 = 48057.5

    £48,057.50 is the maximum amount of money I would stand to lose if the ‘Germany 30’ dropped from its current 9611.5 level to zero.


    CFDs and Leverage

    As a form of trading involving leverage, instead of having to put down the cost of the trade-in its entirety (at 9611.5 x 5 that would cost £48,057.50, the same as my nominal risk) I only need to put in a small percentage of the overall value to initiate the trade. We work this out as a percentage of the nominal risk – if the margin is 1%, then 48,057.50/100 = 480.575. Therefore, rounding upwards by a penny, £480.58 is the amount needed to initiate the trade.

    If, however, I had decided to sell £5 of ‘Germany 30’ instead of buying it, the price of my trade would be as follows;

    9610.5 x 5 = £48,052.5

    The amount I would need to put into my trade would, therefore, be 1% of that, meaning £480.53

    Traders are advised to remember that increasing leverage increases risk.

    CFD Trading Results

    Going back to the scenario where I bought £5 rather than sold, if the ‘Germany 30’ subsequently moves up to a level of 9613.5/9614.5, and I decided that this would be a good point for me to exit the trade, I would work out the profit on my trade as follows; the amount I bought x the number of points that the trade has moved in my favor.

    In this case, my profit would, therefore, be 5 x 2, meaning that I would make a profit of £10 on the trade.

    Alternatively, had I sold £5 of the ‘Germany 30’ at the 9610.5 level and then closed the trade at that 9613.5/9614.5 level, my loss would be 5 x 4, seeing as the price of my closing trade would be four points higher than when I opened it. In this case, my loss on the trade would be £20.

    If however, the ‘Germany 30’ fell from 9610.5/9611.5 to 9608.5/9609.5 – had I bought £5 of the ‘Germany 30’ at the original level my loss would be calculated as follows; the amount I bought x the number of points that the trade has moved against me.

    In this instance, my loss would be 5 x 3, meaning that I would make a loss of £15. On the other hand, if I had sold £5 of ‘Germany 30’ at the original level, then my profit would be 5 x 1, giving me a profit of £5.

    Forex swap is the overnight charge/credit amount for an open position.
    The amount reflects the interest rate difference between the central banks (based on market rates and spreads) of the two assets involved.

    Swaps are credited or debited once for each day of the week, with the exception of Wednesday, on which they are credited or debited 3 times their regular amount.

    Swap charges are released on a weekly basis by the financial institutes which Fortrade works with, and are calculated and determined according to various risk management criteria and market conditions.

    The swap premium is calculated in the following manner:

    Pip Value (Depending On Trade Size) * swap rate in Pips * Number of Nights = Swap charge/credit

    Forex Example:
    You open a short position (Sell) on EUR/USD for 1 lot with an account based in USD:

    1 Lot = 100,000
    1 Pip Value = 10 USD
    Swap Rate = -3.2839 Points (equivalent to 0.32839 Pips)
    Number of Nights = 1
    Swap Premium: 10 * 0.32839 * 1 = 3.2839 USD

    CFDs Example:
    You open a long position (Buy) on Crude oil for 1 lot (1,000 barrels) with an account based in USD:

    Swap Rate = -0.3807
    1 Cent Value = 10 USD
    Number of Nights = 1
    Swap Premium: 10 * -0.3807 * 1 = -3.807 USD

    A trader has an open SHORT or SELL position of 1,000 Crude Oil Barrels.

    The current contract closing quote is 45.50 (Bid)/45.54 (Ask), and the new contract quote is 46.50 (Bid)/46.54 (Ask).

    The difference is +1 USD, i.e., the new contract is HIGHER than the old contract.

    To rollover the open short position, Fortrade automatically closes the old contract at the ask price of (since the client has a SELL position, it will be closed in the ask price, which is 45.54), and simultaneously re-opens at the new contract bid price of 46.50.

    In this example, the client is credited with the sum of 960 USD, reflecting the price difference between the two contracts. It means that the customer’s charge is equivalent to the spread of the Bid and the Ask (i.e., the new contract will be opened at the Bid price, which is 46.5).

    The calculation is: (46.5 – 45.54) * 1,000 = 960 USD

    (Old Contract Closing Ask Price – New Contract Opening Bid) * Amount = Rollover Charge/Credit)

    If you do not wish to incur rollover adjustment costs, simply close any open positions before the scheduled rollover date. These dates may be found on the Rollover Rates page of our website. Clients are also advised of upcoming rollovers via notifications on the Fortrader trading platform.

    Rollover rates are provided and updated directly to our website. To view the most recent rollovers and an annual schedule of dates for rollovers, please click here.

    Please note, rollover charges/credits are also reflected inside the Swap column of our financial instruments’ Trading Conditions (in addition to an already existing Swap charges).

    CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider.
    You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Be Aware: You can lose all,
    but not more than the balance of your Trading Account. These products may not be suitable for all clients therefore ensure you understand the risks and seek
    independent advice. This material does not constitute an offer of, or solicitation for, a transaction in any financial instrument. Fortrade accepts no responsibility
    for any use that may be made of the information and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of
    this information, consequently any person acting on it does so entirely at their own risk.

    The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country
    or jurisdiction where such distribution or use would be contrary to local law or regulation.

    When performing transactions in the OTC Forex market, the possibility of making a profit is inextricably linked with the risk of losses. Conducting transactions
    can lead to the loss of part or all of the initial investment. Before commencing operations, make sure you understand the risks involved and have sufficient skills to invest.

    The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country
    or jurisdiction where such distribution or use would be contrary to local law or regulation.

    CFDs and margin FX are leveraged products that carry a high level of risk to your capital. You should only trade with money you can afford to lose. Be Aware: You can lose all, but not more than the balance of your Trading Account. You do not own, or have any rights to, the underlying assets. Past performance is no guarantee of future performance. This information is intended to be general in nature and is not financial product advice. Any advice contained on this website or provided to you by Fort Securities Australia Pty Ltd is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. We encourage you to obtain independent financial advice and consider our Financial Services Guide (FSG) and Product Disclosure Statement (PDS) before deciding to enter into or obtain any financial products issued by us.

    The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

    CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Be Aware: You can lose all, but not more than the balance of your Trading Account. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice. This material does not constitute an offer of, or solicitation for, a transaction in any financial instrument. Fortrade accepts no responsibility for any use that may be made of the information and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information, consequently any person acting on it does so entirely at their own risk.

    CFD trading is only available in provinces in which Fortrade Canada Limited is authorised, which include British Columbia and Ontario ONLY.

    An Introduction To CFDs

    The contract for difference (CFD) offers European traders and investors an opportunity to profit from price movement without owning the underlying asset. It’s a relatively simple security calculated by the asset’s movement between trade entry and exit, computing only the price change without consideration of the asset’s underlying value.   This is accomplished through a contract between client and broker, and does not utilize any stock, forex, commodity or futures exchange. Trading CFDs offer several major advantages that have increased the instruments’ enormous popularity in the past decade.

    How a CFD Works

    If a stock has an ask price of $25.26 and the trader buys 100 shares, the cost of the transaction is $2,526 plus commission and fees. This trade requires at least $1,263 in free cash at a traditional broker in a 50% margin account, while a CFD broker formerly required just a 5% margin, or $126.30. A CFD trade will show a loss equal to the size of the spread at the time of the transaction so, if the spread is 5 cents, the stock needs to gain 5 cents for the position to hit the breakeven price. You’ll see a 5-cent gain if you owned the stock outright but would have paid a commission and incurred a larger capital outlay.

    If the stock rallies to a bid price of $25.76 in a traditional broker account, it can be sold for a $50 gain or $50/$1263 = 3.95% profit. However, when the national exchange reaches this price, the CFD bid price may only be $25.74. The CFD profit will be lower because the trader must exit at the bid price and the spread is larger than on the regular market. In this example, the CFD trader earns an estimated $48 or $48/$126.30 = 38% return on investment. The CFD broker may also require the trader to buy at a higher initial price, $25.28 for example. Even so, the $46 to $48 earned on the CFD trade denotes a net profit, while the $50 profit from owning the stock outright doesn’t include commissions or other fees, putting more money in the CFD trader’s pocket.

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