Get your trading started with the basics...

CFD & Indices Basics

What are CFDs?

CFD stands for Contracts for Difference, with the difference being between where you enter a trade and where you exit. Simply put, when the position is closed, you’ll receive the profit or incur the loss on that difference.

Trading CFDs gives you advantages of underlying equity while avoiding many of the costs associated with a physical underlying product. For example, when you trade a CFD you’re speculating on the movement of the price only, rather than traditional stocks where you purchase a physical asset. When combined with leverage, CFDs give you quick, cost-effective and flexible exposure to a host of global financial products.

Why Trade CFDs?

  • If you’re looking to invest in the price movements of instruments, rather than purchasing physical assets
  • To take advantage of swift fluctuations in the underlying instrument or security. This is popular with short-term investors looking to profit from intra-day and overnight movements in the market
  • To take advantage of leverage and spread capital across a range of different instruments rather than tie it up in a single investment (note: this approach can increase risk)
  • As a risk management tool to hedge exposure

Example Gold CFD Trade

The price of gold is measured by its weight. Therefore, the price shows how much it costs for one ounce of gold in US dollars. For example, if the gold (XAUUSD) price is $1600.00, it means an ounce of gold is traded at US$1600.00. Similarly, the price of silver is its price per ounce in USD. If the silver (XAGUSD) price is 28.00, it means that an ounce of silver is traded at US$28.00.

If you have bought gold for $1600, you do not have an ounce of gold that you can hold, but you rather have the obligation to buy XAU at US$1600. When you close your position, you sell the XAU and close your exposure. If you sell it for $1605.00, you have made profit of $5 for every ounce (unit) of gold in your contract. The same concept applies to silver trading. If you have bought silver (XAGUSD) for $28.00 and sell at $28.50, you would have made a profit of $0.50 for every ounce of silver in your contract.

 

 

Index Futures Rollovers explained

AxiTrader’s Index contracts are based on the relevant futures exchange price. Futures contracts expire because they are related to a definitive date. There are many months traded and the forward prices can be higher or lower depending on market conditions.

In order to remove final day volatility, at AxiTrader we switch from using the front month contract into the second month’s contract one trading day prior to the exchange expiry.

An example of this is when the Australian SPI contract for March expires. The June price needs to be used and the price on the AxiTrader MT4 platform may increase or decrease depending on the value of the June contract relative to the March contract. This is obviously not a price rise or fall in the SPI but just a move to a new reference price, therefore no profit or loss will be incurred as a result.

In order to ensure this does not affect our clients, a cash adjustment needs to be made. This is explained in the following examples:

SPI March closes at 5050/5051 and SPI June opens at 5000/5001

 

Your Position: 10 Buy contracts

If your position is a Buy, it closes on the old Bid price of 5050 and reopens on the new Ask price of 5001. Because you are in a Buy and the new market price has decreased, your open trade P&L has made a loss. As a result you will receive a positive adjustment amount in your swap column equal to the difference of the old bid and the new ask.

You will receive (5050-5001)*10 contracts = $490AUD

 

Your Position: 10 Sell contracts

If your position is a Sell, it closes on the old Ask price of 5051 and reopens on the new Bid price of 5000. Because you are in a Sell and the new market price has decreased, your open trade P&L has made a gain. As a result you will receive a negative adjustment amount in your swap column equal to the difference of the old ask and the new bid.

You will receive (5051-5000)*10 contracts = -$510AUD

Accounts will be cash adjusted on positions held at the following times:

  • HSI Future – Close of business on the day 3rd to last business day of the contract month.
  • CAC40 Future – Close of business on the day before the 3rd Friday of expiry month.
  • DAX30 Future – Close of business on the day before the 3rd Friday of expiry month.
  • S&P Future – Close of business on the Wednesday the week before the 3rd Friday of expiry month.
  • FT100 Future – Close of business on the day before the 3rd Friday of expiry month.
  • DJ30 Future – Close of business on the Wednesday the week before the 3rd Friday of expiry month.
  • SPI200 Future – Close of business one day before the 3rd Thursday of expiry month.

Oil Rollover Explained

AxiTrader’s oil contract (WTI) is based on the ICE futures price (Front-Spot Month). This futures price is the largest price benchmark for the global oil industry.

Futures contracts expire because they are related to a definitive date. There are many months traded and the forward prices can be higher or lower depending on market conditions.

In order to remove final day volatility, at AxiTrader we switch from using the front month contract into the second month’s contract one trading day prior to the exchange expiry.

An example of this is when the WTI (West Texas Intermediate) contract for September expires. The October price needs to be used and the price on the AxiTrader MT4 platform may increase or decrease, depending on the value of the October contract relative to the September contract. This is obviously not a price rise or fall in oil but just a move to a new reference price and therefore no profit or loss will be incurred as a result.

In order to ensure this does not affect our clients, a cash adjustment needs to be made. This is explained in the following examples:

 

Example 1: Long position of 1000 barrels

September Contract closes @ $110.00

October Contract opens @ $111.38

Cash adjustment of – $1,380 is made on account

Profit of $1,380 is made on open position

Net financial effect is zero.

 

Example 2: Short position of 2000 barrels

September Contract closes @ $110.00

October Contract opens @ $111.38

Cash adjustment of +$2,760 is made on account

Loss of $2,760 is incurred on open position

Net financial effect is zero.

Download MetaTrader 4

Start practising your trading with a 100% FREE 30 day trial. Experience trading in a safe and secure, real-time replica of the live markets.
Get started with a FREE $50,000 demo account
  • For your security all data is encrypted during transmission

Ready to go straight live? Open a Live Trading Account Here