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- FAQs / Currency & CFD Trading
Currency & CFD Trading
Most frequently asked questions
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.
