What is the breakeven price in CFD trading – OA.com

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What is the Breakeven Price? – Explained for CFDs

Updated on: 6 January 2020

There are a lot of concepts you need to get familiarized with when it comes to the trading business. As a beginner, you absolutely have to watch your steps, because entering the trading industry is literally stepping on a minefield. The competition is ruthless and the risks, as a newcomer, are extremely high.

The only way to learn how to move and prosper within its environment is to accumulate as much information as you can. Like I said, there are a ton of concepts to learn about, all being equally important in their own way. However, today we will be focusing on one of the most infamous of them – the leverage.

And I say infamous because, whether you consider it the true money-maker feature or a real harbinger of apocalyptic losses, leverage definitely has a major impact in the trading market. And you are here to learn everything you can about it.

The ABCs of CFD trading and the magic of the CFD leverage

The leverage is the main thing that attracts people towards CFD trading (Contract For Difference). Here is how it goes. In your everyday forex trading transactions, if you want to pay for an asset, you need to offer the full price. You want to purchase 1.000 shares at $3 each? Then you have to pay $3.000 for the lot.

Now, there are mainly 2 types of people that deal with classic trading options involving full buys: the rich ones and the rookies. Sure, there are pros that like to stick to that type of trading as well, but they are definitely the minority. Why? Well, I thought it was obvious. Because of the CFD trading and the leverage.

The leverage is the ability to use one asset’s full value without having to pay the asset’s full price for you to do that. So, if you want to control a $3.000 worth of an asset, all you have to do is to pay a fraction of that amount. Usually between 5% and 25% of the full price. And you borrow the rest from your broker.

Why is this fact important? Because, by doing so, your gains will be defined by the full value of the asset you are controlling, not by what you have literally invested. What this means is that you get to invest, say, 10% ($300) and your gains will be multiplied based on the asset’s real price of $3.000, instead of taking your 10% investment as a point of reference.

I don’t think I need to explain how much money you can make off of that simple system, do I? I have been trading using leverage-based strategies for a lot of time now and I have had my ups and downs, I have to admit it. But, after being in the business for so long, I came to understand just how effective and productive this mechanism is.

Here is what I mean by that:

– You get access to otherwise inaccessible markets – Not everybody has the financial potency to risk thousands or tens of thousands of dollars on high-value markets, where usually the big sharks played. Leverage changed that, by the simple fact that you can control an expensive asset or security by only paying a percentage of its real value.

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This translates by opportunity. The opportunity to operate on the same markets as the big boys and juggle with the same money they do. This, in my opinion, is one of the most seductive aspects of leverage altogether.

– The winnings multiply considerably – Since you get to control high value assets, your gains will grow depending on the asset’s real value, not what you have actually invested. This is the aspect that attracts most of the people in the CFD trading.

– Lower risk of losing your money – Think of it this way. Say you need to control a $20.000 position in the forex trading. What you need to do is to actually invest $20.000 and buy that position, right? Now, what happens if your bet fails? You lose $20.000 in one go. Nothing you can do.

With the leverage being used, if you want to control a $20.000 position, you only need to invest a percentage of the sum. Say 10%, which is $2.000. If your position fails and you close out in time, you can actually minimize the loss by a lot. You will only risk $2.000 instead of $20.000.

You don’t have to be a math genius to see the advantages.

– Raises interesting opportunities – Let’s say you have a tip regarding a major trade between two corporate giants that is bound to send ripples throughout the entire economic and financial sphere. What do you do? I bet you would be interested in acquiring some shares, right? But the problem is that the shares have already begun growing and your capital is too low.

One word – leverage. You use leverage to access a higher capital and buy as many shares as you can, thus allowing you to take advantage of an opportunity that would otherwise be inaccessible. And, trust me, it happens a lot.

This is what I personally love about CFD trading. Now, since we are here, I want to expand on some aspects. Leverage works by acquiring a margin. A lot of people are confused about the difference between the two, so I would like to clarify that aspect here, before going any further.

The margin represents the amount of money you borrow from your broker. The debt itself. The leverage is the act itself of borrowing and getting capital increase by using the margin. Think of it this way. The margin is the lever you pull and the leverage is the effect that follows.

With that out of the way, let’s focus on the least pleasant aspect of resorting to leverage trading.

How does leverage work in CFD and are there any downsides?

You will never hear about the risks of CFD leverage trading and for good reasons. He is interested in keeping you active for as much as he can, because an active trader is a profitable trader, regardless if he wins or loses. There are very few brokers that will actually break it down to you fair and square.

Which is why I am here. Call me the Voice of Reason, but I think that, as a broker, lying or hiding information from your potential clients will only help build an unflattering reputation.

So, here is what you need to know about CFD trading leverage that you don’t hear too often:

1. Capital multiplication can work against you

People tend to forget that leverage is potentially rewarding and damaging at the same time. If you get pumped at the idea of multiplying your potential gains by a factor of 10, you will surely deflate in an instant at the idea of multiplying your losses by an equal amount.

This is the nasty side of any leverage trade and it eventually bites on all traders who tend to disregard the danger and take the mechanism for granted. The notion of capital multiplication can be both seductive and scary and this is one golden rule you need to take with you each time the trading market calls.

2. It is an unreliable when the asset is extremely volatile

The risk of leverage slapping you over the face is multiplied when the asset is extremely volatile and unpredictable. Because, if you can’t determine its movement pattern or trend, the risk of losing your capital will become extremely high.

And, with leverage, you will end up even losing capital you don’t have, because of how the win-loss multiplying mechanism works.

3. The risk of losing sight of the market’s movements

With leverage, you need to be almost constantly wired to the trading market and take immediate actions when you notice that the things start going downhill. Cutting the losses is one of the main CFD trading strategies and you won’t be able to pull that off if you are not connected to the matrix nearly around the clock.

Once you have lost sight of the market, the consequences might hit you like a sledgehammer, crashing your world around you. Because, remember, with leverage, the losses could gain epic proportions quick.

Is there a way to use a safety harness?

Reader, meet Leverage Risk Management. From now on, this little guy will be your best friend. Treat him well and listen to what he has to say, because he is one smart little fella. Risk management, when dealing with leverage, is absolutely imperative. It is imperative in trading in general, I will give it that, but it is that much more important in this particular situation, when things can go haywire in the blink of an eye.

In order to prevent those unpleasant possibilities, there are certain security measures you can resort to:

1. Feel the market, become the market

I have to say, this is my personal favorite. Keeping the market under strict surveillance and analyzing trends, patterns, news and tendencies is what will get you out of a lot of problems. Prevent instead of treating, because treatments are usually more expensive and overall riskier.

And with CFD trading you need to double down on that market analysis as often as you can. When it comes to the trading business, most of the surprises are bad surprises.

2. Only get safe assets

By safe assets I mean those that are overall steadier and don’t tend to swing from one extreme to another too often. In other words, look for assets or securities with a low volatility factor.

If you are going to ignore my advice and aim for the more volatile ones, at least make sure you can predict the direction the asset will head.

3. Use stop-losses orders

This will help you exert a higher degree of control over the losses whenever the value of a certain asset goes into the wrong direction. It is a safety measure you can add to your margin account and you can and should activate it before taking on any serious engagements.

4. Don’t go multi-bidding

The more experienced traders will resort to leverage multi-bidding, placing bids for several assets at the same time. In and of itself, this bidding method isn’t necessarily bad. It gives way to a lot more profit over shorter periods of time.

But imagine what will happen if your bids fail. Imagine the financial hole you will find yourself in. It is smart to take one asset at a time, especially when you are in your trading childhood and lack the proper knowledge and skills to control the outcome of a trade.

The verdict

All bad things aside, leverage is good. Leverage is actually great. But using it properly is a matter of finesse and know-how. So, here is my advice. Don’t jump into it head first! Take your time and learn the drill, experiment a bit with free trading software demos and see where that gets you.

And when you finally get to risk your own money, make sure you have risk management strategies put in place to protect you from any potential downfall. Other than that – Godspeed!

What is a Spread? – Spreads Explained for CFD Trading

Updated on: 6 January 2020

The road to financial trading is filled with obstacles and if you are to become at least half as good as you hope to be, you have a lot of information to deal with. Notions like margin, leverage, breakeven price, spread and everything in between serve as the foundation for understanding how the trading sector functions.

So, today we are going to talk about the spread and what exactly makes it such an important concept for any trader, regardless of his experience. In the financial industry, the spread represents the difference of value between the buy price and the sell price and it is applicable to any type of asset or goods being transacted.

An incursion into the basics of financial trading

Let’s take an example of that, so it will be easier to understand:

In financial terms, the spread is the difference between the bid and the ask price. In this case, we have an asset positioned under the 2 main tags – SELL and BUY. The BUY is the bid price and the SELL is the ask price. These are the 2 options you, as a trader, can operate under.

What you will notice is that the asset’s SELL tag displays 5,589.4, whereas the BUY tag displays 5,590.4. Here, as you can probably see, the spread equals to 1.0, because that is the difference between the SELL and BUY. This value will constantly vary depending on a number of factors, but the principle remains the same, which is: there will always be a difference between the ask and the bid price you can exploit.

Now, there are several aspects you need to take into account when talking about the spread:

– The buy price will always be higher than the sell price – If it would have been the other way around, nobody would have bought anything, ever, because the profit would have been all gone. You can see that when you are trading currency. The BUY and SELL options will always differ by the fact that the BUY option will always hold the higher value.

It is how both brokers and traders make profit, as long as they get to take advantage of the spread (the difference between BUY and SELL) and create profit.

– A tight spread makes room for larger profits – It is one of the basics of spread. Think about it logically. If you are able to buy for almost the same price you could sell it for, making profit would be extremely easy, because you will have more room to add financial value to the asset before selling it.

On the other side, if the spread gap is too large, you probably won’t have any profit margin at all. You can’t buy extremely high and sell it for an extensively higher value.

– The value of the spread is dictated by the number of market participants – This is a good thing, because it gives you the opportunity to develop specific strategies to increase your chances of making profit. What is more important to keep in mind is that the more participants take part in transacting a certain asset, the tighter the spread of that particular asset becomes.

The reverse is that the spread loosens up when the number of traders decreases.

– The value of the spread is also dictated by major market events – They don’t even have to be major, because anything that happens on the market, no matter how small and petty might seem, will send ripples through it. The only thing that differs is the intensity.

This means that having a solid grasp of what is going on in the economic and financial spheres is one of the must-dos if you are to either avoid unpleasant surprises or take advantage of the pleasant ones.

Is it necessary to know all these facts? Absolutely. I would even go one step further and claim it is imperative. I have seen a lot of people, at one point successful traders, who have almost been ruined by not paying attention to the spread and investing more than they should have.

Which goes to show keeping your eye on the spread is important from two perspectives: it helps defining your profits and it can help you save your money or cut the losses, when things go south.

The benefits of spread betting

There is an important thing we need to mention before jumping to the actual benefits. Spread betting is illegal in the US. Not illegal in the UK, though, so, if you are interested in this form of trading, you know what you have to do. By any means, refrain from resorting to any practices that are against the law. It will never end well for you.

With that being said, here are some actual advantages of taking on spread betting:

1. You are trading on a margin

You know how the margin functions, right? You only need to bid a certain percentage of the asset’s value, instead of buying the asset entirely. This translates by lower investments and higher payouts.

2. The market is open 24 hours per day

This means you are not limited by specific timeframes, which is something you won’t find on the traditional markets.

3. The profits are tax-free

Unlike buying and selling shares, for instance, this time you are not requested to pay any type of capital gains taxes on your raw profits. At the same time, you are not required to pay any commissions either, since they are already included by the spread bid.

4. Multiplying your gains with the help of leverage

The leverage lets you bid based on a percentage of the asset’s value (which represents the margin). In other words, you can open and maintain a position with only a fraction of what that position would require your deposit to be. Needless to say, your gains will increase exponentially when the market moves in your favor, while your financial efforts are minimum.

5. Using short positions

It doesn’t matter where the market heads. One of the main spread betting benefits is that you make money from both rising and falling markets. It is all up to how you decide to play your cards.

In theory, everything seems easy enough. If everything goes well, you should be able to hit it big with no problem. But we both know that is now how things function. As a result, you have a lot of things you need to be cautious about. Some which you can control, some which you can’t.

The risks of spread betting

Like I said, there are some risks, the majority of them, that you can actually prevent for the most part. Other, unfortunately, will be completely out of your control, an aspect that lays at the very foundation of the trading business as a whole. Because, as you may know, the first lesson of trading is you can’t control the outcome 100%.
So, we are going to take these risks one by one and see what you should expect when going into the business.

1. Avoid shady brokers

One of the main problems most people find themselves buried in is that they get ripped by their own brokers. Some resort to spread manipulation without their consent, leading to the brokers increasing their profits, while their clients take the losses.

Your best course of action would be to only select those brokers with a pristine reputation and recommendations. Trust me, there are more dirty brokers out there than there are honest ones. As a result, you need to know what to look for.

2. The leverage

Yes, the leverage can get you a lot of money. The problem is it can take it away with the same ease. Not to mention that, in reality, the leverage can make you lose money you don’t have, as your account will fall to negative literally overnight. This is why you see people ending up owing ten times more than they have invested in a matter of days and it is all because of how the leverage works.

3. Look for the cheapest provider

I believe this one is a common sense advice. Pretty sure you didn’t actually need it. What you do need to know, though, is that not all brokers include their brokerage fees in the value of the spread bet. As a result, you may experience additional costs during the trading.

4. The market is volatile

But, then again, the market functions the same regardless of the type of trading you are focusing on. So, in this regard, it is your primary job to elaborate risk management strategies, mainly involving keeping the market under strict surveillance. This is among the best ways of preventing unwanted surprises.

Is spread betting worth it?

At the end of the day, I guess this is where we draw the line. After all, what truly matters is being aware of the risks and knowing what strategies to adopt to minimize them as much as possible. You may have noticed I said nothing about knowing the benefits. That is because, once you can protect yourself from the risks, the benefits will come on their own. You don’t need to summon them.

So, is spread betting worth risking your money? Let me start with the conclusion: yes. And here is why:

– You can choose when to make more money – If you have read this article carefully, you know by now that the most advantageous situation for you is when the spread is tight, right? What does that tell you? It is pretty simple: only start trading when the market is at its peak. The more traders buy and sell and create a competitive environment, the tighter one asset’s spread will become. Which equals larger profits.

– Only trade main currencies – This is closely related to the first point. The main currencies are those that attract all the focus. This will narrow the spread value as a result. If you want to go for secondary currencies (in the sense of their importance on the market), they will automatically offer a wider spread and, thus, less profit.

– Learn when or when not to risk – I agree, this one tip focuses on experienced traders, those who already know what they are doing. But it doesn’t hurt to keep it in mind as a beginner as well. If you are like me and work hard, learn and adapt fast, you will probably develop a certain risk sense, knowing when a trade is worth it and when it isn’t.

My last advice would be this. Learn all about financial spreads. Learn and improve your game and, most importantly, never lose sight of your goals and don’t lose focus. In this industry, what comes around goes around.

And your main focus should be on making it come around more often.

What is the breakeven price in CFD trading? – OA.com

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