CFD trading terminology
Before you start trading CFDs, it’s important to familiarise yourself with the basic CFD terminology. There is plenty to learn, but below is a quick look at some of the most common terms used by traders.
CFD → a Contract for Difference (CFD) is a popular type of financial derivative instrument (such as indices, commodities, currencies, equities and more). CFD trading enables investors to speculate on fast-moving global markets based on the rise or fall of the market or instrument, without actually owning the underlying financial asset.
CFD Trading → when an investor trades on margin. The investor can go short (sell) an instrument if they think the price will do down in value, or go long (buy) if they believe the price will go up in value.
Margin → this is the amount of collateral borrowed ('leverage') in which to fund an open position. It is the minimum deposit that is required and any other additional deposits that may be needed to maintain that position ('variation margin')
Initial margin → the initial amount required in order to open the position. It is often also referred to as an “initial deposit”.
For example: with an open position of $250,000 and leverage of 50:1, the required margin would be $5000.
Leverage trading → also known as “margin trading” is the process in which an investor borrows a significant amount of capital from a broker in order to open a much larger position than the initial margin requirement.
Leverage ratio → the amount of leverage provided by a broker to trade a leveraged product. The amounts typically offered are 50:1, 100:1 and 200:1, however the leverage offered will also depend on the trade size of the position.
Maintenance margin → refers to the minimum amount of funds needed on a trading account in order to keep positions open. It is also referred to as 'variation margin'.
Used Margin → the amount of margin currently being used for open positions. It is calculated by adding up all of the initial margins of all open positions.
Balance → the sum of the cash and any net realised profits or loss on a trading account, based on closed positions/liquidated positions.
Equity → the total value of an investor’s account. Available equity is the value which is available to continue investing on the account ('free margin').
Free margin → funds available on an account to trade with (not currently being used by open positions).
Margin call/close out → when a trader has open losing positions and does do not have enough equity to cover those positions, causing their account to become at risk of close-out. Therefore, maintenance margin payments are required to keep those positions open.
Overnight charges → a charge implemented by a broker for holding a position open overnight. It is also known as an “overnight finance charge”, and is linked to the interest rate of the underlying currency. Essentially, the charge is an interest payment to cover the cost of the leverage that you use overnight. An overnight charge reflects the cost of borrowing or lending the underlying asset and are charged at LIBOR (or equivalent interest rate). Either a plus or minus percentage is applied (+/- %) on the total value of the position.
Futures contract → this is a future contract for the execution of a transaction at a set date in the future. The price for the future transaction is agreed in the present. Futures contracts are commonly used when trading index CFDs.
Equity balance → equity is your account value using the following formula to calculate it: Balance + any P&L from open positions = account equity
Lot → a lot is the size of your CFD trade. When trading CFDs, the value point per movement of one lot will vary between each market. See our website for Product Specifications page for details on our products.
For example: 1 lot of the UK100 is equivalent to £10, whereas 1 lot of France40 is €10, and 1 lot of gold is 100 ounces.
Buy position ('going long') → a long position refers to the purchase of an asset, with the expectation that its market value is set to rise.
For example: Trader ‘A’ is looking to trade EURUSD, which has a current “bid price” of 1.1740 and an “ask price” of 1.1742. Trader ‘A’ believes the price of EURUSD is going to go up in value to around 1.1800. Based on those believes, Trader ‘A’ would open a buy position (go long) in EURUSD for the “ask price” of 1.1742. (If you wanted to buy EURUSD at the market price, then it would be sold to you at the ask price).
Sell position ('going short') → a short position refers to the sale of an asset, with the expectation that its market value is set to fall. It is the opposite of “going long” (buy position).
For example: Trader ‘B’ believes the value of USDJPY is going to go down. The pair has a current “bid price” of 109.03 and an “ask price” of 109.05. Based on the belief the pair is going to fall in value, Trader ‘B’ would open a sell position (“go short”) in USDJPY for the “bid price” of 109.03.
Stop loss order → a stop loss order is a risk management tool to help protect against large losses if the market moves in the opposite direction of an investor’s trade. It is an order to automatically close a position once it reaches a specific predetermined price preset by the investor. A stop loss order will remain active until the order is cancelled or the position is closed.
For example: You open a buy position on the UK100 at an entry price of 7300. However you don’t want to risk anything more than a 10 point loss. To limit your maximum loss, you would set a stop loss order 10 points lower than your entry price at 7290. Please note, that placing a normal stop loss order does not 100% guarantee you will be filled at that particular market price. See definition of ‘Slippage’.
Take profit order → a take profit order is a risk management tool allowing a position to be closed automatically, once it reaches a specific preset profit goal. This protects against profits being lost in an unanticipated reversal of price direction before the investor can close the position.
For example: You open a buy position on the UK100 at an entry price of 7300. However, you would like to set at order to close your trade automatically when the market price hits a certain profit level. In this instance, you may set the take profit level at 7320.
Profit/Loss → indicates the value of a position as to whether your position is moving in your favour (profit) or moving in the opposite direction and going against you (loss).
Guaranteed stop → a guaranteed stop loss order is different to a basic stop loss. It is also used to protect against the risk of slippage. An investor is usually charged a fee on the trade (by your broker) for the use of a guaranteed stop if it is triggered.
Slippage →the difference between the requested market price and the actual price that the trade was filled at. Slippage is based on two factors, liquidity and volatility. It can occur in fast changing market conditions or in markets where there is a lack of liquidity.
Trailing stop →a dynamic stop loss order that moves your stop loss level automatically as the market price of that instrument fluctuates.
For example: You set a trailing stop of 20 pips on a position. This means the position would remain open until the market price moved against you by 20 pips. Once the trailing stop is hit, an order would be executed to close out for position Market order → an order that is executed at the current market price, the moment you decide to buy or sell. You will be given the best available price at the time of execution.
Pending order →an order set up and pending execution. It is an instruction (‘order’) set by a trader to open or close a position when a certain ‘target price’ that trader has set is reached. Limit order and Stop orders are both examples of pending orders.
Good till cancelled (GTC) → an instruction attached to a pending order. It is an instruction for a pending order to remain on the platform’s system until it is either filled or cancelled. The order will remain active until that point.
Good till date (GTD) → an instruction attached to a pending order. It is an instruction for the pending order to remain active until a specified expiry date and time (set by an investor).
For a more in-depth look at common words, terms and useful phrases associated with trading and the financial markets, please visit our Trading Glossary page. Alternatively, find out more about applying a disciplined risk and money management trading strategy.
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