Like any financial assets in the world, crypto trading is offered by many platforms. In this article, we will explore cryptocurrency or Bitcoin CFD trading, which is one of the popular methods of trading cryptocurrencies.
CFD stands for Contract For Difference. It is one of the trading method used to trade an asset without actually owning the underlying assets.
It lets you leverage an asset based on the speculations of its future movement. In other words, CFD enables you to bet on the price of the asset.
According to your prediction, you set your position as long or short(we will discuss them later). If the market moves according to your prediction, you make a profit and vice-versa.
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Trading terminology
Let’s get acquainted with the technical terms associated in CFD:
Ask Price: The price at which a trader can buy CFD.
Bid Price: The price at which a trader can sell CFD.
Margin: Margin is a certain percentage of the money you need to pay to open a trade. For example, if the margin requirement is 20% and you’re placing a trade worth $2,000, you’d need to deposit $400.
Leverage: Leverage is a trading tool that allows you to buy and sell CFDs with more capital than you own. So, you only need to deposit a certain percentage of the full value of the trade to open a position. For example, you bought 100 shares by paying $10/share for $1000. If the leverage ratio is 6:1, your assets worth magnifies to $6000 instead of the original $1000.
Stop loss. Stop-loss order is a trading tool that lets you set a price level at which you want your CFD position to close. It is a security feature that allows you to minimize your losses if the market moves against you.
Limit: Limit order lets you set the price level at which your position will be closed so that you can get any profit before the market moves against you.
CFD Trading Software – eToro vs PrimeXBT vs Capital.com vs AvaTrade
CFD Trading by Example
CFD trading is a leveraged product and sometimes referred to as ‘trading on margin’ because the funds needed to open and maintain the margin, which represents only a fraction of the total size of the asset.
So, you don’t need to put up the full cost of the cryptocurrency. You only need to cover the margin, which is calculated by multiplying your exposure with the margin factor for the market you are trading.
Let’s take an example to understand where all these terms fit in the context of CFD. Imagine Bitcoin with a bid price of $27.59, and ask price of $27.60.
Scenario 1:
You think that the price of Bitcoin (BTC) will go up, so you decided to go long (buy low sell high) with 2000 CFDs at $27.60. It is the equivalent of buying 2000 BTCs.
If BTC has a margin factor of 5%, then your margin would be 5% of the total exposure of your trade (2000 CFDs x $27.6 = $55,200), which is $2760.
As speculated, the price of BTC climbs. You decide to close your position when it reaches $29.60. You reverse your trade to close a position, so you sell your 2000 CFDs for $29.60. In this case, your profit per CFD will be $29.60 — $27.60 = $2, and that of 2000 CFDs will give you a profit of $4000!!
Consider the price of Bitcoin falls, which is against your speculation. You decide to cut your losses (stop loss) and sell your 2000 CFDs at $26.60. Your position has moved $1 against you, which means you make a loss of $2000.
Scenario 2:
You think the price of Bitcoin will go down, so you decided to go short ( sell high buy low) with 2000 CFDs at $27.59.
If Bitcoin has a margin factor of 5%, then your margin would be 5% of the total exposure of your trade (2000 CFDs x $27.59 = $55,180), which is $2759.
As speculates, the price of Bitcoin fell, and you decided to close the trade by buying CFDs at $26.60. Your total profit from this trade will be (27.59- 26.60)*2000, which is $1940.
But in case the price of Bitcoin goes high and it reaches at $29.60. To stop further loss, you bought them at $29.60 per CFD. Your loss from the trade will be (29.60–27.59)*2000, which is about $4020!!!
So, leveraged CFDs can magnify both your profits and losses. One should be careful when dealing with CFD trading.
Next, we will talk about the things to remember while indulging in CFD trading and platform which allow you cryptocurrency Bitcoin CFD trading.
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