CFD Trading and Orders
Orders are the way in which traders interact with CFDs, and make their trading intentions known. Suppose you want to buy a CFD position in oil, on the logic that reductions in supply will lead to higher prices. This goes from being a reasoned, researched concept into an actual trading position via an order, which is the instruction to buy placed with the broker by the trader. Orders can be made to build up a sophisticated structure of automated trading decisions, in addition to playing the primary role of interaction with the markets, and allow traders extensive flexibility to establish in-depth conditions to attach to each trade.
There are a number of different order types you’ll come across during your time as a CFD trader, and knowing what each of them means and does is an important step towards being able to implement them in your trading. Remember that orders represent the only tools of the trade you have in terms of interacting directly with the markets, so understanding what they do and when you should be use them becomes a crucially important consideration.
Buy orders are, fairly obviously, used to execute buying decisions. They are arguably the most straightforward order on offer, because buy orders simply represent a positive endorsement of the relevant market. Traders buy CFDs in order to profit from the market when it rises, with the profit portion lying in the middle of the initial buy price and the final sell price. Buy orders, which are usually filled swiftly (particularly when dealing with brokers directly, as opposed to trading on exchange), are best deployed in situations where you feel the relevant asset or market is likely to rise in value over the short-term, whether as a result of some economic indicator or other market performance factor.
Similarly, sell orders are broadly the same as buy orders, but on the reverse side of the deal. Sell orders can be effected as a starting point and a conclusion to a trade, with a view to closing out on the difference. With CFDs, it makes no difference whether a market is moving up or down – you can still profit from that market by ensuring you adopt their right type of exposure. So, for markets that traders anticipate are likely to fall in value over the shorter period, selling with a view to buying back at a later stage enables traders to profit in much the same way as if they had foreseen growth and bought the market when they took their exposure. This has no impact on leverage or earnings whatsoever, and is all just part of the flexible offering from CFDs.
Beyond the basics of buying and selling, which is fairly obviously conducted through buy and sell orders directly, the stop loss is arguably the next most commonly implemented order, providing traders with a crucial mechanism through which they can manage their exposure to risk. The stop loss works by setting a floor price at which a position will be automatically closed. In essence, CFD positions carry the danger of unlimited losses, and in especially volatile markets, this can make CFDs a highly risky option. However, stop loss orders can be deployed to give a guarantee of an exit point, with a view to minimising liability and capping the risk faced by the position. Stop losses can be set at points below the market price, and can be varied according to how the market moves throughout the duration of the trade.
On the flip side, stop limits provide the reverse functionality to the stop loss – capping losses on short positions, or indeed set an automatic profit-take level on long trades. When a trader takes a short position, he needs that position to perform poorly in order to make a return. If the position performs well, it will generate a loss, in much the same way as a long trade that underperforms. And as we know, CFDs have the capacity to deliver both unlimited earnings and losses with each transaction. The stop limit sets an automatic barrier price through which your position will be closed, and is set above the market value. This enables traders to commit to a more defined risk, while also enabling automatic closing to safeguard profits in long transactions.
Good Till Cancelled (GTC)
Alongside execution orders such as buying, selling and stops, there are also a number of more technical orders which specify how the trade itself will be conducted. These effectively automate the trading process to a large extent, by setting defined terms such as when a position should close and in what circumstances it might be cancelled. One of the main types of order that fall into this category is the Good Till Cancelled order (GTC). GTC means that a position will remain open indefinitely until such point as the trader agrees to close out. This means positions will be automatically held over night (with finance charges accruing) until you expressly cancel the transaction, allowing for an automation of trading intention that saves time and attention. GTC orders are best deployed with positions forecast over a period of more than one trading day, to give a degree of certainty to the trade.