What is Contract for Difference?

'CFD' stands for 'contract for difference' and consists of an agreement (contract) to exchange the difference in the value of a currency, commodity, share or index between the time at which a contract is opened and the time at which it is closed. If the asset rises or falls in price, the buyer receives or earns cash from the seller.

CFD pricing is based on the movements of the underlying asset.

As a very simple example: if you buy a ‘contract for difference’ at $14 and sell at $16 then you will receive the $2 difference. If you buy a CFD at $10 and sell at $8 then you pay the $2 difference.

Basically, a CFD contract means that you are not physically exchanging currencies, nor purchasing any assets, but you are simply making profit or loss based on your speculation of the price movement.

Benefits of trading CFDs compared to centralised exchange:

• Wide range of instruments: CFD contracts are possible on almost any asset!
• Ease of access – trade via online platforms.
• Convenient risk management tools, such as Stop Loss/Take profit, being able to specify lower trade sizes.
• Leverage offerings allow smaller investors to participate.
• Fewer restrictions, open and close positions at any time.
• The ability to go short (sell) as well as going long (buy).
• The possibility of hedging risk. i.e. you can trade in opposite directions on the same asset and at the same time.

Long & Short are simply different terms for ‘Buy’ and ‘Sell’.

'Long' position (Buy)
In order to make a profit, the asset price must increase.

“Short” position (Sell)
In order to make a profit, the asset price must decrease.

If you open a ‘Long’ position, and the price starts to decrease, you will begin to make a loss. If you open a 'short' position, but the price starts to move up, the trade will begin to go into a minus.

So, traders may say they are going long on a particular asset, or that they are shorting it.

Stop Loss & Take Profit are technically pending orders that you can attach to positions, to trigger the closing of an order once the specified level is reached.

• ‘Stop Loss’ - used to limit losses, or potentially to take a profit after a loss. It should be placed below the current market price for buy positions, and above the current market price for sell.
• ‘Take Profit’ - used to lock in profits at a specified price, or potentially to limit further losses after a substantial gain. It should be placed below the current market price for sell positions, and above the current market price for buy positions.

These types of orders can be attached to a position at the time of opening, or you can modify an existing position. They can also be attached to Pending Orders.

It is important to note that all Stop orders including stop loss, are executed with ‘Market Execution’, whereas limit orders including take profit are executed with ‘Limit execution’.

This means that setting a stop loss does not mean that you are guaranteed to be filled at the exact level you have set, because the price available in the market at the time may be above or below your requested price.

Please refer to the FxPro Execution information for more details.

‘Pending Orders’ are orders that are set to open a predefined price in the future. Provided your price is triggered, a relevant Buy or Sell trade will be opened automatically.

Stop Orders are placed in expectation the price direction will continue on in the same direction after a certain level is reached.

There are two types of pending ‘stop’ orders:

• ‘Buy Stop’ – Placed above the current market price, with the expectation that prices will rise to trigger the opening of a buy trade, and then continue to rise.
• ‘Sell Stop’ – Placed below the current market price, with the expectation that prices will fall to your specified level and trigger the opening of a sell trade, and then continue to fall.

All pending Stop orders are executed with ‘Market Execution’, meaning that the trade is executed with VWAP (Volume Weighted Average Price) .

Please refer to the FxPro Execution information for more details.

‘Pending Orders’ are orders that are set to open a predefined price in the future. Provided your price is triggered, a relevant Buy or Sell trade will be opened automatically.

Limit Orders are placed in expectation the price direction will reverse once a certain level is reached.

There are two types of pending ‘limit’ orders:

• ‘Buy Limit’ – Placed below the current market price, with the expectation that prices will fall to your specified level and trigger the opening of a buy trade, and then reverse direction.
• Sell Limit’ - Placed above the current market price, with the expectation that prices will rise to your specified level and trigger the opening of a sell trade, and then reverse direction.

All pending Limit orders are executed with ‘Limit Execution’, meaning that you receive the requested price, or a better one if it is available.

Please refer to the FxPro Execution information for more details.

• Trading CFDs means that you are speculating on the price movements of the underlying asset, without any physical purchase.
• Benefits of CFD trading include ease of access, various order types, fewer restrictions etc
• A Buy trade is called a long position, and Sell trade is called short position.
• Stop Loss is used to limit losses, whereas Take Profit is used to lock in profits
• Pending orders can be used to trigger the opening of a trade at a pre-defined level in the future
• Pending Stop orders are used in anticipation of a price continuation
• Pending Limit orders are used in anticipation of a price reversal