Breaking down the big price mechanism in CFD
Every trade has 2 parties involved, without which it can’t function: the buyer and the seller. They move around in the trading market with the help of bids, whether it is selling or buying. This is the pulse of the market. The moment the bids start, it comes alive.
Now, a bid price is public, because it is subjected to the rules of competition. By placing a bid price, you are subject to competitive bids forcing you to change your approach and increase your bid. And what you see on the panel, in the BUY and SELL sections, represent the values installed by the last trades, mainly the last price the asset was sold for, and the last price it was bought for.
So, how do you actually operate the bid price when going on a trade? Let me break it down for you, for an easier understanding. There are several aspects that explain how the trade works:
If you want to buy an asset, you will either place your order in the BID section, if you want to compete with others and get a lower quote, or in the ASK section, if you want to pay the seller’s price directly.
In opposition to that, the party that wants to sell the asset will either go to the ASK section for a direct sell, or choose the highest contender in the BID section, for a smaller price.
As you can see, both buying and selling for the bid price will hold lower values than selling or buying the asset directly. Bidding for an asset, however, doesn’t mean you will automatically get the asset, it just means you are competing for it. Whether or not you will get it depends on the competition and on how far you are willing to go.
How CFD pricing works and how to improve on your approach
In this regard, you need to know the factors that influence what the bid and the offers will behave like. Because the bid and offer prices depend on the financial value of an asset at a given point in time. And the financial value of an asset depends on several factors that may swing it one way or another. Often out of the blue.
These factors include:
– How much liquidity the asset has – In other words, how traded and desired it ultimately is. Because the more it is traded, the higher its financial value will become and the tighter the spread will become (the spread being the difference between the buy and the sell prices).
– How volatile it is – If an asset is too volatile, it is more likely to deliver larger swings in terms of value. Traders could win and lose a lot of money in one go, depending of the direction the asset moves to. Highly volatile assets are usually the focus on the trading markets, because they tend to generate the highest incomes. That is when the trade is well thought of in advance, obviously.
– How many trades exist for that specific asset over a given period of time – I already explained this aspect, but it doesn’t hurt to hover over the details. If an asset is the centerpiece of the trading market, for any given timeframe, its value will inevitably grow and the spread will tighten. As a result, more money is to be made off of it.
But knowing how are CFDs priced is just the beginning. Next thing you need to focus on is how to actually make your bid work and get better at it. And this is where it gets interesting.
Top trading strategies to help you win bids
As I have already said it, a specific CFD price depends on several factors. Having those under close supervision will definitely give you the upper-hand in any trade, because you will constantly know what to expect.
But once you have entered the trading market and start working on your skills, you need to have a list of strategies to attend to. Otherwise, you will be swimming blindly in shark-infested waters. And, trust me, it never ends well for you.
This is why, here are some effective and tested bidding strategies that will definitely help you improve on your game significantly:
1. Bid snipping
Despite its confusing name, bid snipping is such an intuitive strategy that unexperienced traders use it without knowing they do. It is, in essence, bidding as late as possible, in an attempt of sniping the asset. Hence, the name. This strategy relies on time manipulation, because it is imperative for you to place your bid in the last minute of the auction or even the last seconds.
However, keep in mind that this is only a circumstantial strategy. In the sense that it doesn’t work on all cases. It does have its flaws, like the fact that it may be adopted by multiple bidders at the same time, causing an avalanche of last-seconds bids, especially because, since everyone is delaying their entrances, the current winning bid will be extremely low.
But, when played at the right moment, bid snipping can be incredibly rewarding.
2. Bid nibbling
Contrary to bid snipping, that relies on one effective late shot for the prize, bid nibbling focuses on repeated bids to chew on the competition. In other words, you need to check how the bid prices evolve and immediately up the offer, in order to always remain on top.
It is quite effective, especially since you don’t need to update your bid by a lot. We are talking about small amounts, the minimum you can to allow you to place first. This way you will force your competition to remain permanently wired to the auction, so it wouldn’t fall behind.
It is a specifically effective strategy in most cases.
3. Low-ball bids
I have to be honest with you: this one has a poor winning chance. But, since it is a real strategy, no matter how poor, I had to mention it here, because you will find it at work throughout the trading market. Those who use it are almost always those who have low funds to begin with.
And the strategy itself is pretty self-explanatory. It refers to bidding the lowest price available for an asset, regardless how expensive the asset is in reality. In this sense, you will see traders going for $10 bids for a $6,000 asset, simply because the minimum bid price is set at $10.
Do you have a chance of winning a bid like that? Sure you do. Just that it is extremely unlikely. This is because an extremely low bid price, compared to the asset’s value, will attract a lot of traders that will automatically boost the bids considerably.
4. Proxy bidding
This refers to an automatic bidding system, where you instruct your broker to place bids on your behalf. All you need to do is to set up a maximum bid offer, say $1,500. Then the broker will automatically update your bid, depending on how the competition bids, always placing the lowest amount possible.
So, for instance, the broker will only top the current bid by $1, if the system allows it, and keep upping by that amount, until it reaches your maximum amount of $1,500. Then it stops. And if anyone bids over you with $1, you have lost the asset, because the broker can go as far as you have instructed him too.
Which is why it is a good idea to keep track of the auction to prevent such cases from occurring, even though the bidding process is automatic.
A 5th option would be to purchase the asset directly, in case you want to avoid the bidding jungle. All you need to remember is that, when you decide to pay the CFD price directly, you will always pay more than if you were to bid on it. Not much more in most cases, but more.
So, what is there to be learned from today’s article? There are several key points:
- What is a CFD price
- The factors that influence its position or movement
- The top winning bidding strategies
Remember these simple guidelines and your road to becoming a professional wealthy trader will shorten significantly.