June 21, 2019 | 02:23 AM


05.07.2018CFDs: What do the different tools do?

In recent years, online platforms have become something of a fascination for those who want to dip their toe into the world of trading. Here, then, is a quick guide from FatCat.com.au.

In recent years, online platforms have become something of a fascination for those who want to dip their toe into the world of trading. From purchasing stocks and shares online to speculating on the outcome of foreign exchange market movements, there are plenty of ways that the internet has revolutionized the range of trading options available. 

One of the major vehicles for this kind of trading is the “contract for difference”, or CFD. In essence, a CFD is a derivative: while a trader who buys a CFD for, say, gold doesn’t own the actual gold itself, the CFD allows them to speculate in real-time on the way in which the gold market will move. And as CFDs tend to be traded on margin, they can also benefit from leverage to boost returns (or, conversely, deepen losses).

In order to achieve this, though, it’s practically essential for a trader to get to grips with the wide range of order execution tools that are available on trading platforms. Many of these have actually been borrowed from the world of stock market trading, which is indicative of how similar the user experience of a CFD trader and a market trader will be. But for someone who’s either new to both or who hasn’t had time to properly understand the order execution functions, it can all seem a bit overwhelming. Here, then, is a quick guide.

Market orders

The market order is the most simple of all the order execution tools, and it’s one that even the newest CFD traders will know how to do – even if they don’t know it by name. In essence, it’s simply the act of placing a trade at the current market price, with no bells and whistles. So if a CFD’s current value is 100 points, a market order would open a position at 100 points for the trader there and then – without any specified conditions or requirements.

Limit orders

In some circumstances, though, it won’t make sense for a trader to institute a simple market order. They may want to only open a position once a certain market point has been reached, for example, but they don’t want to sit at their device and wait for that to happen. In this scenario, a limit order allows the trader to specify that they want a position to open once the market reaches a level specified entirely by them – which saves time and allows for a much more strategic approach to be taken.

Stop losses

Other than the market order, for the newbie trader the stop loss is the order execution term that will come up most often – at least at first. It’s perhaps the most basic of all of the order execution tools, as it allows traders to manage their trades ahead of time. In the event a trader has an open position on a market and the market then begins to move in reverse, the stop loss can kick in at the point of highest acceptable loss pre-specified by the trade, which saves them further losses. This tool exists in reverse, too: the take profit function allows traders to close their position once a particular profit level has been reached.

These tools are in no way an exhaustive list, and they barely scratch the surface of how a trader can manage their CFD portfolio in an intelligent and – hopefully – lucrative way. Powerful CFD trading platforms are able to do all sorts of other handy things: traders can often, for example, split up a position so that they close just some of it while keeping the other portion open. It’s advisable, then, for traders to have a long think about their proposed strategy, and decide what functions they need from their chosen CFD broker or platform. That way, they’ll be able to choose the right platform straight off the bat. 

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