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CFD For Begginers en
CFD For Begginers en
The purpose of this ebook is to introduce you to the most commonly traded financial
instruments today — CFDs. In addition to the basic definitions and concepts that you
need to understand if you want to start thinking about trading on the financial markets,
we will also briefly introduce you to rudimental methods of trading and analysis.
CONTENT
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
What are CFDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Definition of CFD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A brief history of CFDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Types of CFD instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Advantages and disadvantages of CFD instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The role of a broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Basic trading glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Trading Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Basic metods of analyzing CFD markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Fundamental analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Technical analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3 ways to trade on CFD markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Position Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Advantages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Swing Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Advantages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Intraday Trading and Scalping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Advantages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 4
Definition of CFD
CFDs, or „contracts for difference“, are financial instruments that allow you to speculate on the
change in the price of an underlying asset (e.g. currency pair, gold, oil) in the financial markets.
Through CFD contracts, you can trade Forex (currency pairs), stock indices (sets of shares used as
an indicator of the viability of a particular sector of the economy or market), equities or commodities,
and precious metals.
By trading CFDs, you do not physically own any underlying instrument and only speculate on the
rise or fall of its price. Therefore, if you trade gold through a CFD and place a buy order, you don’t need
to be afraid of finding a neatly packaged gold nugget at your doorstep within a few days of your
“purchase”. You are only ever betting/speculating on which way the gold price will go.
And that is the great advantage of CFDs. You can speculate on both the rise (Long) and fall (Short)
of the underlying asset‘s price. So if you think the instrument will rise, you open a long position.
Conversely, if you want to speculate on a decline, you open a short position.
LONG SHORT
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 5
Each of these types of instruments is traded slightly differently, but they all have one thing in common
— they are CFD contracts. And that gives them certain advantages and disadvantages.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 6
+ Advantages
Financial leverage
One of the main mechanisms of online CFD trading is financial leverage. This is the ratio of the amount
of capital you put into your account to the funds provided by your broker. In simple terms, it is
essentially capital borrowed from the broker, which is not reflected in the balance of money in your
account, but which allows you to trade a greater volume of transactions than you could with your
own money. The maximum amount of leverage is 1:30 for brokers in the EU, which basically means
that you can trade up to 30 times your account balance on the instruments you choose. Thus, leverage
can multiply your profits very quickly, but the same applies to losses. That‘s why we‘ll mention leverage
in the disadvantages section as well.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 7
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 8
− Disadvantages
Financial leverage
Since leverage not only enhances profits but also potential losses, it is necessary to include it among
the disadvantages of CFD trading. Traders who decided to „leverage“ a trade that later failed learned
it the hard way. In a better case scenario, they only lost a certain part of their capital. In the worst case,
they could have gone into the red and ended up in debt. Fortunately, if you trade with an EU regulated
broker (such as Purple Trading), you cannot go into the red, no matter how big your loss is. It‘s called
negative balance protection, and it‘s one of the main reasons why beginner traders in particular
should seek out a regulated broker.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 9
A quality broker should be as transparent as possible and above all you should trust him. A high level
of transparency, together with above-average standards for client/trader security, is monitored in
the EU by ESMA (European Securities and Markets Authority). Choosing a broker licensed to operate
on the EU market will, for example, ensure you the aforementioned negative balance protection.
In addition, beginner traders should be particularly wary of so-called offshore brokers. These are
licensed in less regulated countries and can be identified, for example, by the amount of leverage
they offer (which can be as high as 1:999 compared to the maximum EU leverage of 1:30). Purple
Trading is licensed in Cyprus by the regulatory authority CySEC. Thus, it meets all the standards of
protection of client capital and transparency of conduct set by the European Union.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 10
Lot
One lot is the basic unit in trading. It usually contains 100,000 units of the base currency/
instrument. You can also find mini lots (0.1 lot) and micro lots (0.01 lot). If you are starting with
trading, you should search for a broker that offers trading in micro lots. This way, you can try
trading on the smallest amounts possible.
Pip
The price of each currency pair is quoted to 4 or 5 decimal places. Pip is the smallest increment
of a currency pair. Thus, if the price of EUR/USD changes from 1.2300 to 1.2310, it is a movement
of 10 pips.
Spread
The difference between the buying and selling price. The size of the spread tends to be one of the
basic parameters by which traders choose a broker.
. Trader
A trader who speculates on the price movement of CFD contracts.
Forex
Trading category in which you speculate on the price movement between two foreign currencies.
The term originated from the phrase „foreign exchange“.
Margin
A certain part of a trader’s account balance blocked by the broker in order to cover any losses that
might happen during trading. Margin is blocked simultaneously with every opened position and
is unblocked back once the trade is closed in profit.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 11
Liquidity
The ability of a broker to fill a client‘s trade order in the market at the client‘s desired price and quantity.
Money management
Money management means the management of money. It is a set of rules by which a trader
manages the size of a position with respect to the size of the specified risk in order to maximize the
growth of the trading account.
Volatility
Refers to the volatility of the price of a given asset. It indicates how much and how often the price
changes. High volatility increases risk and low volatility decreases risk.
Time Frame
The specific time period you are analyzing on a price chart. It can be a daily, hourly, thirty-minute, or
other interval that influences your trading decisions. The lower the time frame, the faster the price
movement on the chart, and the more challenging the trading.
BID price
The market ask price at which traders‘ sell/short positions are executed and buy positions are closed.
It is lower than the ASK price and the chart in the platform is also plotted based on this price.
ASK price
The market bid price at which buy/long positions are executed and sell positions are closed. It is
higher than the BID price.
Swap
A fee for holding a position overnight.
Tick
The smallest possible movement/change on the chart.
Bear market
Declining market.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 12
Bull market
Rising market.
Trend
The longer-term direction in which the price of the financial instrument you are monitoring
is moving. Trends can be downward (bearish), upward (bullish), or horizontal, as well as short,
medium, or long-term. They are an important factor for investors and traders when deciding
whether to buy, sell, or hold a particular asset.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 13
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 14
Trading Platforms
Trading platforms are programs, web interfaces, or mobile apps through which you can send your
orders to the market. They are a kind of imaginary gateway to the world of financial markets. In very
simplified terms, the way the platforms work is that they take an order from you and send it to your
broker‘s servers, from where it is then sent on to the market where a counterparty must be found to
match it.
There are a large number of trading platforms and some brokers even have their own. One of the
most popular platforms is MetaTrader 4 released in 2005. But, it is also possible to come across modern
trading platforms such as cTrader. Nowadays, traders are far from being reliant only on trading from
a computer, they can also trade on their mobile phones or log in via their internet browsers without
having to install anything.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 15
Fundamental analysis
Understanding fundamentals and their impact on financial markets is undoubtedly the more difficult
discipline of the two. Fundamentals are influenced by many different factors ranging from macroe-
conomic data to bond yields to a country‘s foreign policy. At the same time, it is a more time-consuming
type of analysis and it certainly takes more time to understand. That is why most traders, in the be-
ginning, devote their time primarily to technical analysis. Yet it is the fundamentals that are behind
the long-term trends in the markets. So realistically, it takes you more time to analyze the market, but
you are doing it because of a trade that can last several months.
In practice, you can think of a fundamental trader as someone who watches the economic news has
Bloomberg or other major economic stations running in the background, keeps up with the biggest
geopolitical conflicts, but also keeps an eye on the weather. On the basis of this information, he/she
then gets a picture of the direction in which, for example, the price of oil is going. He/she then uses
the technical analysis of the chart only to confirm his/her thesis.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 16
Technical analysis
Technical analysis is one of the most widely used methods of analyzing financial markets. It is the
observation of a chart over time, where we try to estimate future development based on historical
data. Above all, it is a statistical model in which every trader tries to find an advantage in the form of
a trading opportunity. Statistical advantage is the only thing you can rely on in technical analysis and
what you ultimately want to achieve. Technical analysis believes that history repeats itself. The job of
the technical trader is to look for repeating patterns of market behavior in the chart.
Technical traders approach trading in a completely opposite way to fundamental traders. They spend
the vast majority of their time analyzing charts in an attempt to recognize certain patterns. Some use
various support programs to do this, others rely on their own trained eye. Once they have identified
the patterns, they have a statistically quantified chance of success, which they often increase by
confirming their judgment with additional indicators from the chart. They only take fundamentals
into account to the extent that they know when important macroeconomic reports are going to be
published, during which a sharp increase in volatility can be expected in the markets.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 17
Position Trading
Position trading is a style of trading in the financial markets in which a trader holds trading positions
for an extended period of time, often several weeks or months. In position trading, traders focus on
identifying long-term trends in the markets.
By holding a position for several weeks or months, a trader must take into account not only technical
analysis but also fundamental analysis. In addition, they often have to factor in overnight fees (called
swaps) — broker does not always charge you with swaps, but you will see them on some
instruments.
+ Advantages − Disadvantages
The advantage of the position trading style is The disadvantages of the position style are the
the fact that it‘s time-saving — this approach huge demands on the trader‘s patience and
does not require the trader to spend much also the wallet. Traders who prefer short-term
time in front of the trading platform. He or trades will tell youthat they do so because they
she opens a position, simply checks it for a few can‘t go to sleep without constantly checking
weeks, and then closes it. the platform. These are exactly the temptations
traders.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 18
Swing Trading
The second slowest trading style. Focuses on short-term fluctuations in asset price movements. The
goal of swing trading is to take advantage of these shorter-term deviations.
It is therefore typical of swing trading strategies that traders look for significant price movements
(larger than the daily average) in the platform chart and tend to keep their positions open for up to
several days and weeks. Swing trading strategies thus try to make the most of trends and fluctuations
in the market. However, these trends are not as long-term as in the case of position trading.
If you are a swing trader and you manage to execute a swing strategy correctly, you can ride the trend
wave of a correctly anticipated price movement from its beginning to its end. This is often a cause
for celebration.
+ Advantages − Disadvantages
The advantages of the swing approach also The disadvantages include higher demands on
include the time-saving nature of position patience or disruption of the sleep cycle. This
trading. However, unlike position trading, swing is when a trader is unable to fall asleep without
trading is less financially demanding which checking the screen once in a while in case there
gives traders the opportunity to open multiple is an unexpected reversal in the market.
trades at the same time. The slower pace of
swing trading gives traders the opportunity to
think each trade through. Last but not least,
swing trading is very suitable for technical
analysis.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 19
In intraday trading, the trader mainly uses technical analysis. Fundamental analysis is of limited im-
portance, the trader basically limits it to knowing when significant fundamental news will be presented.
Once the news is published, trader tries to take advantage of the volatility that will arise as a result of
the news. The actual outcome of the news is an afterthought for the day trader.
Scalping is also a type of intraday trading. This is the fastest form of trading where traders move on
minute time frames and open and close their positions within minutes or even seconds. Scalping is
generally considered the riskiest form of trading and should be avoided by beginner traders. However,
there are proven scalping trading strategies that can limit this risk.
+ Advantages − Disadvantages
When you ask day traders or scalpers why they Disadvantages such as extreme psychological
chose this method of trading, they will often demands or the need for advanced technical
argue that the lack of holding trades overnight analysis make intraday trading and scalping
gives them undisturbed sleep. However, a style unsuitable for beginner traders. In
the biggest advantage is probably the high an environment where trading opportunities
frequency of trading opportunities — on lower appear and disappear extremely quickly on the
time frames during volatile periods, the price chart in front of you, it is very easy to succumb
simply „flies“ more, which can be exploited with to negative emotions such as greed, impatience,
skill. Intraday traders or scalpers also have the or even fear. When scalping in particular, it is
opportunity to react more flexibly to current very difficult to adhere to the basic principles of
market events. rational thinking.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 20
CONCLUSION
This brings us to the end of our brief ebook on the basics of trading CFD instruments.
We‘ve tried to conceptualize it in a way that gives you a rough idea of how trading in the
financial markets works, but without going into too much detail in writing it. Trading in
the financial markets is a long journey that not everyone can take. But those who make
it to the end can‘t help themselves but praise their decision to persevere. That‘s why, if
you ever get there, it will be an honor to have helped you in the very beginning.
We are also happy to answer any trading-related questions you may have at
info@purple-trading.com.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.
Introduction to CFDs 21
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
71,7 % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether
you can afford to take the high risk of losing your money.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high
degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should
carefully consider your investment objectives, level of experience, and risk appetite.
The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should
not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign ex-
change trading, and seek advice from an independent financial advisor if you have any doubts.
Any opinions, news, research, analysis, prices, or other information contained in this material is provided as general
market commentary, and does not constitute investment advice. L.F. Investment Limited will not accept liability
for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from
use of or reliance on such information.
Purple Trading is Cypriot national trade mark (no. 85981), National UK trade mark (no. UK00003696619) and European Union trade
mark (no. 018332329) owned and operated by L.F. Investment Limited, 11, Louki Akrita, CY — 4044 Limassol, Cyprus, a licensed
Cyprus Investment Firm regulated by the CySEC lic. no. 271/15.
71,7 % of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you can afford to take the high risk of losing your money.