How To Open A CFD Position? - A Step By Step Guide
To trade CFDs, buyers and sellers purchase CFD contracts. They don’t own these CFD assets and instead, speculate on the price movements. This article is aimed at educating on how to open a CFD position.
CFDs carry great risk with them so you have to be careful when trading them.
They are leveraged financial products so that means you have to deal with margin and leverage when trading CFDs.
This can both be a curse and a blessing. Both your losses and profits are magnified due to leverage.
A great deal of thought should go into opening a CFD position. Just because an asset looks attractive doesn’t mean you should go after it.
It should match your trading skills, capital, and risk preference along with other factors.
For now, let us focus on the processes involved in opening a position and maintaining it.
Steps Involved In Opening A CFD Position
Step 1: Choosing a CFD broker
First and foremost, you need a broker and a platform to trade CFD assets. A broker acts a medium between you and the market.
Choosing a broker is no easy task in itself. A lot of thinking and consideration have to go towards this decision making.
You have to look for regulation, fees, trading platform, demo accounts, assets, and other crucial factors when it comes to choosing a broker.
Once you choose your preferred broker, you have to make a deposit to fund your account. Now you are ready for the next step.
Step 2: Exploring the market
Now that you’ve chosen your broker and trading platform, you can explore the market and choose your preferred asset to trade.
The great thing with CFDs is the range of assets available. You can trade stocks, shares, indices, commodities, cryptocurrencies, and even currencies (forex).
CFD trading caters to all type of traders due to this variety in the asset. Now you may not be familiar with all the assets so it is better to stick to the ones that you have an idea about.
For example, traders who deal with only currencies can trade forex as CFDs. It is important to diversify your asset portfolio to minimize your risks, but that doesn’t mean that you should invest in assets that you have no idea about.
Step 3: Open the CFD Position
Now that you’ve decided which asset to trade, you have to make a few other things related to opening the position.
Let’s explain this with the help of an example. Consider that you have decided to trade the EUR/USD pair.
Here are the things you need to set and be aware of before you open your position:
Going long or short
You need to decide if you want to go short or long. You go long (buy) when you anticipate a price increase, and you go short (sell) when you anticipate a price decrease of that asset.
The buying price and selling price of the asset is always different. Generally, the buying price is lower than the selling price.
Consider our EUR/USD example. Let’s say the buying price is set at $1.1375 and the selling price is set at $1.1380. Spread is the difference between the selling and buying price.
According to your prediction, you will decide to go long or short. If your prediction turns out to be right, you will win money and you lose money when the opposite happens.
Therefore, you need to be careful before making up your mind. Use the various technical tools and indicators that are provided by the platform in your analysis.
You need to decide how many contracts of that asset you are buying. Of course, the minimum contract size is 1.
If you are a beginner trader, the recommendation would be to start with small contracts and work your way up as you gain trading knowledge and experience.
For example, at the time of writing, the current value of 1 stock of Amazon is worth $1,823.28.
The value of one contract equals to the value of one stock. Nowadays broker even offers mini-contracts so giving you more choice and flexibility.
Leverage and Margin
Leverage and margin are two important aspects of CFD trading. CFDs are leveraged financial products.
This means that you only need to deposit a small amount to trade larger positions. We call this iniital deposit as margin.
Keep in mind that leverage and margin are not the same for all CFD assets. It varies from asset to asset. It can as low as 3:1 to 400:1.
Higher leverage means more profits but can also incur huge losses if your position goes against you.
For beginner traders, we would recommend trading those assets which have a low leverage ratio to keep your risk level low.
Stop and limits orders
Brokers provide stop and limit orders for your own benefit to prevent excessive losses.
When you set a stop loss, your broker automatically closes your position when your losses reach a certain level.
This isn’t always guaranteed, so brokers offer a guaranteed stop loss order (GSLO) for a premium fee.
Other similar orders include take profits, and trailing stops. Limit orders close your position once you have reached a certain profit level.
That’s it. You have done all the necessary steps required to place a CFD trade. Now all you have to do is monitor your trade to make it a success and finally close it.
To know about closing a CFD position, make sure to check our article on how to close a CFD position.
In this article, we have listed the whole procedure that goes into opening a CFD position. It starts from choosing a broker, platform, then choosing your preferred asset.
You have to then decide whether to go long or short, determine your contract size, choose your leverage, and set stop/limit orders. The whole process is simple and takes less than a minute.