CFD Online Trading - 1
CFDs are usually traded online using electronic trading systems. A trader receives quotes in real time and can make his/her transaction at any moment.For example, a trader plans to go long on EUR/USD. In the quotation/transaction window he sees a current Bid and Ask price similar to the line below (demonstration only):
1.38505 / 1.38510
The difference between the Bid price and the Ask price is the Spread, which can range anything from a few pips to more. For the euro/dollar pair, a change in price by 0.0001 is referred to as a change by 1 pip, with the spread in this case being equal to 0.5 pip. This small spread is usually available for CFD Online Trading on ECN accounts. Other accounts can have a spread of up to 2 pips, which is also very small.
To purchase euros, the trader needs to determine a transaction volume (for instance, 1 lot which equals 100,000 euros) and press the "BUY" button, with the transaction details being reflected in the "Trade" window of the trading terminal.
Let's assume that the price has increased and the new price is:
1.39010 / 1.39020
The trader opts to close the position at this point. To do that the trader must click on "Close on the current price". The closing of the position (that is, selling the previously purchased euro) will occur at the price of the BID that is 1.39010.
This transaction will lead to the following situation:
The trader will have purchased 100,000 Euros (1 lot) at a price of 1.38510 by spending100,000 * 1.38510 = 138,510 dollars
The trader will have sold 100,000 Euros at a price of 1.39010 and received 100,000 * 1.39010 = 139,010 dollars
The difference of the transaction is: 139010 - 138510 = 500 dollars
The sum of 500 dollars is the trader's profit in this case. For more details, check out Trader’s Way.