As an individual exploring online trading for the first time, it can be overwhelming when considering all the available financial instruments to choose from, combined with different strategies to adopt. Stop, take a deep breath, and let’s go over this together.
As a retail trader, there are many ways you can choose to trade. One of the most common ways is through a CFD (Contract for Difference) account. CFDs allow traders to profit from price movement without owning the underlying asset.
It’s a relatively simple security calculated by the asset’s movement between trade entry and exit, computing only the price change without consideration of the asset’s underlying value. You buy or sell a number of units of the particular instrument, determined by whether you think the prices will rise or fall. For every point the price of your traded instrument moves in your favor, you will gain multiples of the number of CFD units that you have bought or sold. For every point the price moves against you, you will make an equivalent loss.
Looking at a more realistic example for a trader, we will use the S&P 500 index.
It is essentially the same for any market such as Forex, Crypto, Stocks, Commodities and the like.
Presently, you foresee that the S&P will rise and so you entered the market at level 6000. As you have expected, S&P rose to 6010, and you made a sale for a 10 point profit.
Let’s say you have also risked $10 per point (Spread Betting), or perhaps you bought 5 mini contracts at $2 per CFD. This would mean that you have made a $100 profit in both instances. A 10 point increase (6000 to 6010) multiplied by your $10 per point is equal to $100 profit.
Or the 10 points increase, multiplied by 5 mini contracts (which cost you $2 per contract) is equivalent to $100 as well since it’s 10 multiplied by 10.
In a situation where the market collapses when you were expecting the markets to rise; what happens then?
There is another way to gain a profit as traders, by selling or “Going Short” in trading terms. We enter into an agreement with another party when we short the market.
Basically, we express that we will sell something at the current price, sometime in the future. They would agree because, in their perspective, they are protecting themselves.
The other party assumes that the market price would increase and they wish to buy at the current price; while you think the opposite is more likely to happen.
Let’s apply this in our S&P 500 example, instead of going long (buying), you will go short (selling) this time at 6000. When S&P falls by 10 points to 5990, you gain 10 points.
The same goes for our spread betting where we shorted 5 mini contracts at $2 each. In both examples, you pocket $100.
When you sell the market, you “lose” money when the market increases in value. Therefore if the market had risen by 10 points to 6010, you would have lost $100.
In the trading world, there will always be a winner and loser.
As a trader, your goal should be to win more than lose in order to make a profit, eventually.
Watch this video as we illustrate trading with a real-life object for a better perspective!