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One of the many advantages of trading the financial markets with CFDs, is the ability to take advantage of any market movement. One company's bad performance could mean a nice cash out for those traders who know how to take advantage of its share price downward movement. It may sound incredible, but that's just how the market operates.
Yes! This means you can potentially take advantage of the financial market, even when it is in decline.
A financial instrument's performance is evaluated by its movement. On any trading day, Oil's price for example, can rise to become more expensive or drop and lose value. Investing in Oil, and seeing its price rise means you can sell it (by closing your deal) for a profit. This type of deal is also called "going long".
One of the main advantages of CFD trading, is your ability invest in a financial instrument even if you believe its price will drop below what it is at the moment. This type of trade is called "going short", and if you're confused, fret no more, the explanation is coming.
On September 16, 1992, a date nicknamed 'Black Wednesday', A Hungarian-American investor named George Soros traded more than $10 billion against the British Pound, profiting from the UK government's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or float its currency.
Finally, the UK withdrew from the European Exchange Rate Mechanism, devaluing the pound. Soros's profit on the trade was estimated at over $1 billion. He was dubbed "the man who broke the Bank of England."
This is what is called "going short": trading against the instrument on the belief that its value is going to decrease below its current price.
The mechanics are the same, you open a 'sell' deal (read example below) by purchasing a CFD, and can potentially take advantage of the price change if it goes lower beyond the point the deal was opened.
Buy deal = Long position = you believe the price will rise
Sell deal = Short position = you believe the price will drop
Trading CFDs, which are Contracts for Diffference, means you're making a contract with your broker about the value of an instrument; your broker will pay you the difference between opening and closing prices according to the direction you chose. So you don't have to buy anything, you just invest in a direction.
CFD online trading offers a trading tool called Leverage.
Leverage provides the power to make significantly bigger trades, while investing a smaller amount.
If you want to purchase a CFD on an expensive instrument, such as the Amazon share (~$950), you can utilize the 20:1 leverage on Amazon offered by iFOREX, and purchase 1 CFD on Amazon share with only $47.5. This means you can take advantage of the movement of the share on the market, while only risking a fraction of the amount needed to purchase it through your bank, for example.
Keep in mind that while leverage increases your trading power, it also increase risk to your investment, so be sure to use it only with sufficient knowledge and training.
Let's say, you're looking to invest $500 in gold CFDs and potentially take advantage of a rise in price.
If gold is priced at $1,250, your invested sum cannot buy even a single CFD without leverage.
By using the available leverage of 400:1 to maximize the opportunity, you can turn your $500 into a buying power of $200,000.
So, at the price of $1,250, this leveraged sum allows you to purchase 160 CFDs on gold.
You can accomplish that on the trading platform, with just 3 steps:
Choose your instrument from over 750 CFDs.
Choose the direction in which you think Gold will move next. 'Sell' if you think it will drop, or 'Buy' if you think it will rise.
Decide how much you’d like to invest: $500 with leverage allows you to buy up to 160 CFDs on Gold.
Your deal is on!
Now, you can follow the price of Gold, and close the deal when you think it's the right time.
If the price of Gold drops from $1,250 to $1,200 (4% drop), and you decide to end the deal, your profit on the deal will be $8,000!
160 CFDs × $50 price change = $8,000
There are endless factors you can calculate into your decision making. A good trader must consider a lot of information if he or she wants to balance his risks:
Follow market events with a good economic calendar. This will allow you to learn about market shaking events, which occur on a regular basis. You can even check how past economic events have affected the market, and learn what analysts are predicting as the possible outcome (some of these events are so important that they rattle the market before they even happen).
Political, weather and global events have direct correlation with market performance. An election event can heavily affect a nation's currency, extreme weather conditions may cause a shortage in some commodities, thus creating a price rise and so on.
Technological breakthroughs, failures and product launchings can seriously affect the share price of companies and their competitors.
In other words, keep your eyes and ears open, and the opportunities will reveal themselves.
And remember- if you think an event will cause an instrument price to drop, you have the option to 'sell' it, and take advantage of that opportunity if your prediction materializes.
Join iFOREX to get an education package and start taking advantage of market opportunities.