Make A Difference with CFDs Trading!

When you trade CFDs with Friedberg Direct - powered by AvaTrade Technology, you not only get to trade with a well-regulated broker using some of the world’s best trading platforms – you can also trade on markets whether they rise or fall!

CFD Trading Methods

There are various trading strategies that are often used when trading CFDs, which even the most unskilled trader can understand.  These decisions involve a number of trading methods and the most popular are Long vs. Short trading.

Long Position

A long position in trading CFDs is when a trader purchases the asset. This will mean that the asset will rise or see an increase in its value over the time of life of the contract.

Short Position

The short position occurs when the trader feels there will be a decline in the asset's value and a ‘sell’ is selected.

E.g.: A short seller’s expectation is that the price of the asset will fall over the life of the contract. If his prediction is wrong and the price of the asset starts to rise the open trade will sustain a loss, which is calculated by the difference between the opening and closing price of that asset over that time.

CFD Trading Strategies

You can follow several kinds of trading strategies when you are trading CFDs. Consider some of the following:

  • Day trading strategy
    As you might have guessed from the name, day trading consists of opening and closing a trade on the same day. Day traders might hold a position for the whole session, or they might only hold a trade open for an hour. Day trading avoids the risks and costs of holding a CFD position open overnight.
  • Swing trading strategy
    Swing trading is similar to day trading because it looks to profit from short term changes or “swings” in price. The main difference is that a swing trading strategy is more flexible, and traders will sometimes hold their positions overnight despite the added costs and risks.
  • Scalping trading strategy
    A scalping strategy goes in the other direction from day trading. That is, scalpers open many extremely short term positions, some lasting as little as seconds. The scalper attempts to make many small profits throughout the day by capitalizing on the prevailing trend or momentum in an asset.
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    How Much Will it Cost to Trade CFDs?

    The spread is the difference between the BUY and SELL prices of a certain instrument. When calculating the cost for a position, you need to multiply the spread by the size of the position. For example, if the spread for crude oil is $0.03 USD, the cost for opening a 10 barrel-position is $0.03 X 10 barrels = $0.3 USD. Most of the CFD instruments are traded on market spreads, which means that the spreads are affected by the liquidity of the market. The more liquidity, the narrower the spread will get. You can review the levels of leverage and spreads for all CFD instruments on our trading conditions & charges page.

    CFD Contract Rollover

    Each index and commodity CFD is based on a contract defining its rates, charges, etc. Each of these specific CFD contracts has an expiry date, which is the date that the contract expires and is automatically replaced by a new contract, just like the real market. In order not to disturb traders during market hours, the contract rollover takes place over the weekend. For more information, you are welcome to visit our CFD Rollover page.

    Hedging with CFDs

    Hedging is a risk management strategy that involves opening opposite or offsetting trades designed to practically mute the risk exposure of open trade in the market. CFDs represent an ideal type of derivative to implement a hedging strategy effectively. To start with, they are low-cost and liquid. But they can also be customised (in terms of size and amount) to meet the specific hedging objectives any investor desires.

    As an example, if you hold $10,000 worth of shares of Tesla in your portfolio, you could hedge the position by selling an equivalent or part amount of Tesla stock CFDs. In that way, if Tesla prices fall, the loss in value in your physical shares portfolio will be offset or cancelled by the profits gained by the CFD trade. You can then close out the CFD trade when the downward retracement comes to an end so as to lock in your profits and to give the value of your physical Tesla shares the chance to rise again.

    CFD hedges are ideal when a market is moving against you (either due to sentiment or overall fundamental reasons) or when the market has moved so much in your favour that any extra gains are likely to be fractional. On the other hand, CFD hedges can be particularly riskier because of leverage; they are therefore not ideal when the underlying market is very volatile or when a retracement has been overextended.

    Disadvantages of CFDs

    Ironically, leverage is one of the biggest disadvantages of CFDs, just as much as it is one of its major appeals. Leverage boosts your profit potential, but when prices go against you, it can leave a devastating puncture in your trading capital. This is because losses are based on the leverage amount and not on your actual trading capital. CFD trading also comes with associated costs. When you open a CFD trade, you have to pay a spread fee which is the difference between the bid and ask prices of an asset. There are also additional costs in the form of rollover fees or swaps for positions held overnight. This is the cost applied for holding a leveraged position (which is essentially borrowed money) for an extended period of time.

    Market volatility is another source of risk in CFD trading. Prices of financial assets are prone to random fluctuations and sometimes even choppy price action. There can also be price gaps that can occur during high-impact news releases or market openings after the weekends. This volatility can mean that you may miss your desired prices when entering trade positions, or your losses can be amplified when prices go against you. A final drawback for CFDs is that you do not own the underlying asset you are trading; you are simply speculating on its price changes. If you are trading a stock CFD, it means that you have no real shares, you do not hold any voting rights, and are not entitled to any dividends.

    CFD Taxation

    CFDs are considered tax-efficient for many investors in different jurisdictions. They do not attract Stamp Duty because they are technically not assets. But CFD profits can be subject to Capital Gains tax in certain jurisdictions. While limited tax liability is rarely a major incentive to trade CFDs, it is important to consider the relevant laws that apply in your specific jurisdiction before you trade.

    Main CFD FAQ for Expert Traders

    How long can I hold a CFD?

    CFDs do not have an actual expiry date and can remain open as long as possible. However, keeping the position open after the market close can incur fees known as a rollover in CFDs or swaps in Forex currency pairs. Therefore, it would be in your best interest to calculate possible swaps in advance and project it onto your expected return.

    Is CFD trading taxable?

    CFD trading, in general, is a taxable income and subject to capital gains tax within EEA. However, UK residents can take advantage of Spread Betting, which is exempt from both stamp duty and taxation.

    Does CFD expire?

    CFDs are not traded in a regular stock exchange, and therefore don’t have expiration dates that would require buying or selling the underlying asset at a certain price.