How CFD trading works
CFDs were initially designed for share trading. With their popularity growing over the years, CFDs are now used to trade a wide range of markets including indices, energies and commodities. In CFD trading, there are two prices: the buy and the sell price. The difference between the two is called the spread. By trading at the buy price, you will profit if the asset’s value increases. By trading at the sell price, you will profit if the asset’s value decreases. Let’s take a look at some trading examples to find out how CFD trading works in practice.
CFD trading examples
Going short on DAX
Let’s suppose that market rumours for the German banking sector suggest that the DAX is about to take a hitting. For that reason you decide to go short (sell) 5 contracts of GER40 at the price of 13,050, which equals to €5 per point movement.
Your prediction proves to be right and the market pushes lower to 12,946. You decide to exit the trade and secure your gains. The total profit is (13,050 – 12,946) x €5 = €520.
Despite the rumours, the market keeps pushing higher above 13,100. At this point, you decide to close the position at 13,089 in order to avoid bigger losses. The total loss is (13,123 – 13,050) x €5 = €-365.
Going long on S&P500
Now let’s take a look at how a long trade would look like. The S&P500 is trading at 2,601, your technical analysis gives you a buy signal and you decide to go long 3 contracts. In this market, 3 contracts equal to $30 for each point movement.
Five minutes before market close, the market price has moved higher to 2,619 and you decide to materialize your profit, rather than risk an overnight move against you. Your total profit is (2,619 – 2,601) x $30 = $540.
During the US session, some unexpected breaking news push the index lower and the market price is now at 2,588. You decide to cut your losses and exit the trade. Your final loss is (2,601 – 2,588) x $30 = $-390.
Although the profit and loss is calculated in the currency of the asset class, there is no reason to worry. A ThinkMarkets account automatically calculates your profit and loss into your account’s currency in real time based on the exchange rate.