Short Selling with CFDs: How to Profit from Falling Markets

Everyone in the trading world knows that there is general knowledge on making money when the markets are rising. But do you also know that it is possible to make profit when the markets are falling? One of the ways traders can take advantage of falling markets is through short selling with CFD, or Contract for Difference. Short selling is less complicated than you would think, with a little understanding it can be a very powerful tool in your trading strategy.

What is the meaning of short selling with CFDs?

This is purely a bet in which the price of an asset will go low. It’s actually against instinct; most people think that they can only make cash when the prices are high, so this is rather counter intuitive. On the other hand, short selling using CFDs lets you gain money when an asset’s price falls instead of rising.

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In traditional stock trading, short selling involves taking someone else’s shares that you would borrow and selling them for the prevailing market price. One then hopes to buy them at a relatively lower price so as to return the borrowed shares while keeping the difference as profit. You are not borrowing nor do you own an asset in CFD trading though.

How do CFD short sells work?

Let’s break this down with an example. You think that the oil price is going to go down. Using a CFD, you go short on the oil contract by selling, hoping that it would indeed go down. When the price goes down as you expected, you close your position at the lower price and get the difference. If it goes the other way, you are in trouble.

For instance, when you sell a CFD in oil at $100 per barrel, and the price then drops to $90 per barrel, you can end your trade and earn a profit of $10 per barrel. In the event that the price goes up to $110, you would lose $10 per barrel. The deal is that CFDs allow you to bet both when prices are going up and when they are falling; that is, of course, a lot more flexible than regular trading procedures.

Why do we use CFDs in Short Selling?

Short selling with the assistance of CFDs has several advantages as attached to it, such as:

Leverage: With a CFD, one can trade using leverage whereby one leverages a much larger position with a smaller amount of capital. Leverage can amplify your gains if the market goes your way but at the same time will also increase the leverage attached to your risks so be watchful while applying leverage.

No Need to Borrow Assets: Unlike short selling in the old tradition where you have to borrow shares from a broker, with CFDs you can just speculate on price movements. In other words, you do not need to borrow securities to short sell; therefore it is easier and cheaper to execute.

Access to Global Markets: CFDs are traded on almost all kinds of assets which include shares, commodities, indices, and forex. This therefore means you are in a position to short sell on most market types aside from stocks.

Profit in Falling Markets: CFD’s ability to make profits in both increasing and decreasing prices makes them very valuable in volatile markets where a downtrend may be imperative for a trade.

Short selling with CFDs is a strategy designed to help traders profit from falling markets. For instance, by giving a prediction of the fall in price, you are able to open a “sell” position and thus earn a profit if the market goes in your direction. While great benefits in such CFD trading styles come with flexibility and leverage, there are also dangers attached, specially during the volatile markets. But then, short selling is not an easy matter to be executed lightly; it requires effective application of risk management techniques. It does not matter whether you are a novice at trading or an old-hat investor; Contract for Difference are very helpful in your trading arsenal to make money in a bull or bear market.