Home Business Insights & Advice The essential steps involved when placing a CFD trade

The essential steps involved when placing a CFD trade

by John Saunders
31st May 19 10:42 am

The Contract for Difference or CFD is an agreement between two business parties to exchange the difference between the opening and closing price of the specific contract. But to engage in cfd trading, there are key steps one has to undertake to ensure they make a wise financial undertaking.

Steps involved in CFD trading

Choosing the suitable market

Saxo Capital Markets offers CFDs on thousands of profitable markets including shares, indices, currencies, commodities, interest rates and bonds. This presents the client with a wide exposure to the major global markets.

With so much choice available, it is important for one to find the most suitable trading opportunity.

Decide whether to buy (go long) or sell (go short)

After choosing a market, then you need to know the current price. One can do this by bringing up a trading ticket to the platform.

In the CFD markets there are two prices. The first price being the selling price (the bid), while the second price is the buying (the offer). The difference between these two is known as the spread. Therefore, the price of your CFD is determined by the price of the underlying instrument.

If you believe that the market price will go up, you buy that market (also known as going long) on the other hand if you believe it will fall; you sell the market (going short).

Select your trade size

With cfd trading one selects the number of CFDs they wish to trade.

In equity trades, 1 CFD is equal to 1 share. When trading indices, forex, commodities, bonds or interest rates, then the value of 1 CFD varies depending on the instrument. One can see which number they are trading on by just looking up at the ‘tick value’ which is usually at the instrument’s market information sheets.

Since CFD trading is a leveraged product, this means that you only need to have a small percentage of the overall trade value, the margin, in your account so as to open the trade. The greater the value of your trade, the more margins required. Therefore one needs to have sufficient funds in their account to place the trade. A margin calculator in the trading platform will automatically calculate the initial margin for you.

Add stop and limit orders

Before placing a trade, it is important to consider your risk management strategy.

A key tactic to manage risk is placing an order such as a stop loss which will automatically close the trade when the market reaches a certain level.

The stop loss order is an instruction which allows the platform to close the client’s open position once it reaches a specific level set by the client. This will be at a price below the current market level thus be triggered on losing trades in order to minimize losses.

A limit order is an instruction by the client, to close the trade at a price which is better than the current market level. It is used to help in locking the profit targets.

Standard stop losses and limit orders at Saxo are free to place and can be easily placed in the dealing ticket during the first place on the trade or once the clients’ trade is open.

Monitoring the trade

After placing your trade with any stops or limits, the profit and loss of the CFD trade will now fluctuate with each move in the market price.

One can also track the prices of stocks, see their profit/loss update on time and add any new trades or close existing trades on their computer or from Saxo’s online platform on their smartphone or tablet.

Closing your trade

By closing the trade, the clients’ net open profit and loss will be realized and immediately reflected in their account cash balance. This is done for them if the set stop loss or limit order has not been triggered.

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