What is CFD Trading

Find out about how you can open Buy or Sell positions with CFDs on financial instruments such as Forex, Stocks, Commodities and Indices with LynxFund.

What is a CFD

'Contracts for difference', or just CFDs, are tradable products that follow the prices of global financial markets. A CFD allows you to obtain direct exposure to an underlying asset, for example, Gold, UK 100 or EUR/USD, without the need of owning the underlying asset. You will make gains or incur losses as a result of price movements in the underlying asset.

What are the main features of CFDs

  • - In both Buy and Sell scenarios, you do not actually own the underlying asset
  • - Access to leverage – you can multiply your trade size by using less capital. Up to 1:300 means that with as little as Mex$2,000 you can gain the effect of Mex$600,000 capital. Accordingly, any potential profits or losses will be multiplied
  • - Short selling is also available – opening Sell positions is just as straightforward as opening Buy positions
  • - Low minimum deposit requirement – a relatively small amount of money is required to start trading stocks, forex, commodities and many more financial instruments

What is the objective of CFD trading

The objective of CFD trading is to speculate on the price movements of an underlying asset (generally over a short term). Your profit or loss depends on movements in the price of the underlying asset and the size of your position.

For example, if you believe the value of a stock, such as Apple, is going to increase, you can open a Buy CFD position (also known as "going long") with the intention to close the CFD position at a higher value. The difference between the price you opened and the price you closed the CFD position equates to your potential profit or loss, minus any relevant costs.

If you think the value of a stock, such as Meta, is going to decrease, you can open a Sell CFD position (also known as "going short") at a specific price, with the intention to close it at a lower price. Your profit or loss is calculated based on the difference between these opening and closing prices.

Popular Trading Strategies

Trading strategies such as Day Trading, Position Trading and Swing Trading are implemented by traders in the hope of profiting in the financial markets.

What is a trading strategy and why is it important

In the world of trading, a strategy is a plan or action you can implement in order to make better trading decisions and try to maximise your earning potential when buying or selling financial products such as CFDs on stocks, commodities, forex pairs and indices. In most cases, a strategy can be customised to your specific preferences and used in conjunction with other strategies.

Having a strategy is important for you as a trader because, when executed correctly, it may help you reach your financial goals. Examples of financial goals could include the establishment of risk tolerance levels, short-term profits versus long-term profits or having a level of financial security to make a major purchase or to improve your cash flow.

What are the most popular strategies?

Three of the most popular trading strategies are:

  • - Day Trading
  • - Position Trading
  • - Swing Trading

Below is some information about each strategy and its key characteristics.

Day Trading

Key Characteristic: Multiple small-size trades held for a short time frame.

As its name implies, the day trading strategy focuses on opening Buy/Sell positions on financial instruments and closing them on the same day (i.e., before the market closes for the trading day). It is a form of trading that requires the ability to respond quickly to fluctuations and subsequent trading opportunities that may arise in the market.

Typically, Day Traders open a number of smaller trades and use stop orders, such as ‘Close at Profit’ (to lock in potential profits), and/or ‘Close at Loss’ (to manage potential losses that can occur).

Due to the volatile nature of financial markets and the rapid price changes that are possible, day trading can have the potential to be very profitable, but also very unprofitable.

Position Trading

Key Characteristic: A single or few large-size trades held for a relatively long time frame.

Position trading is a medium-term holding strategy where traders keep positions open for longer periods of time such as days, weeks or even months.

This strategy typically relies heavily on fundamental analysis, which is a method of measuring the value of a financial instrument by examining freely-available macroeconomic data (e.g. gross domestic product, supply-to-demand ratio, the rate of employment, the rate of inflation, ease of doing business, etc.). To see when major economic events take place, you can use our Economic Calendar.

A position trader may wait until a stock, such as Netflix, reaches a specific support level before taking a long position, or a specific resistance level before taking a short position - and holding it for a few weeks.

There is presumably less immediacy associated with this type of trading, as traders are not necessarily concerned with intraday prices and generally open a small number of positions.

However, traders need to have a firm grasp of market fundamentals given the reliance on fundamental analysis.

Swing Trading

Key Characteristic: A single trade aimed at catching a trend and which is held for a longer time frame.

In swing trading, a trader typically uses technical analysis to look for certain patterns (upward or downward trends in the market). Technical analysis involves the usage of indicators, such as chart tools, to analyse past performance in order to determine the direction of price movements.

The core idea of swing trading is to spot a market trend and try to time the entry into a position in order to catch (and ride) the wave before it crashes. A rising wave represents an upward swing and a falling wave represents a downward swing.

For this strategy, you can make use of the 90+ trading indicators we provide, such as moving averages and Bollinger Bands, which are offered free of charge to all traders.

To try our indicators, simply sign up / log in, select a financial instrument, go to its chart and click on the (Fx) icon.

What are Margins

Margins enable you to use leverage when trading an instrument. This allows you to put down a percentage of the opening value of the trade while still gaining full exposure to the instrument’s size.

This increases a trader’s exposure & risk to the fluctuations of the market. For example, if an instrument moves in a direction that is not in the trader’s favour, they are responsible for the full value of the leveraged trade’s movement.

What is the Initial Margin?

The Initial Margin is the amount required in order to open a leveraged position. The margin ratio gives traders information regarding the power of the leveraged position.

For example, if you are trading an instrument that has an Initial Margin of 5%, or a leverage of 1:20, you only need to put aside that margin amount in order to gain full exposure. The benefit of trading with leverage is that you can realise 100% of the profits of the trade even though only 5% of the total value was used. This can also work against traders, because their exposure to risk is magnified.

A trader will notice that when opening a position, the funds that are used to open the position are deducted from their ‘Available’ funds while their ‘Equity’ remains the same. A simple way to calculate the total available balance is: Available = Equity - Initial Margin.

What is a Maintenance Margin?

The Maintenance Margin is the minimum amount of equity which must remain available in order to keep positions open.

The amount that needs to remain available in your equity to satisfy the Maintenance Margin is half the value of the Initial Margin. For example, if a position requires the trader to put aside 5% of the trade value to open a trade, then they will need to keep only 2.5% of the trade’s value as their Maintenance Margin in their equity to keep it open.

Traders should be aware that if the market moves against their positions and the equity drops near the Maintenance Margin requirement, they will be at a greater risk of a Margin Call.

Traders can see the Maintenance Margin requirements for each product in the instrument details in the Trading Platform.

What is a Margin Call?

A Margin Call refers to the automatic closure of a trade due to insufficient equity.

This happens as a result of a price moving in a direction that is not favourable to the trader, reducing their equity below the Maintenance Margin, meaning that they no longer have enough equity to sustain the position.

Traders can use a stop loss feature as an extra precaution against margin calls but should always remain aware of market movements while positions are open. In order to avoid margin calls, traders can deposit more funds2 to meet the maintenance margin requirements or reduce their exposure by either closing or adjusting their open positions.

What is a Rollover

In the world of trading, a rollover takes place on the expiry date of a futures CFD, where all open positions are automatically moved to the next available contract.

A rollover is an action that is performed by a broker or CFD provider to keep a position open beyond its expiry date. Unlike some CFD providers, LynxFund’s rollover service is available free of charge, allowing you to keep your open positions and orders on futures-based CFD contracts - such as Natural Gas or Oil - without the need for you to manually close and reopen them at a new rate.

Most of the futures-based instruments we offer have an automatic rollover date. If a futures contract is not subject to automatic rollover, your position will close on the expiry date set for the instrument.

Rollovers do not impact your equity

When a position is automatically rolled over, an adjustment is either added to or subtracted from your account to offset the difference between the previous and new contract rates. The value of your position continues to reflect the impact of market movements based on your position’s original opening level, size and spread. In other words, your equity before the rollover remains identical to your equity after the rollover.

A Buy position will receive a NEGATIVE ADJUSTMENT when the new contract is trading at a higher price, and a POSITIVE ADJUSTMENT when the new contract is trading at a lower price.

Conversely, a Sell position will receive a POSITIVE ADJUSTMENT when the new contract is trading at a higher price, and a NEGATIVE ADJUSTMENT when the new contract is trading at a lower price.

Please note that rates for stop orders, such as 'Close at Profit' and 'Close at Loss', are also adjusted accordingly.