Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Contract size
The amount of an underlying asset that is represented by a futures or options contract, expressed in standardised units. Exchanges set this number so everyone in the market is trading the same units. This makes prices comparable and clearing easy. The contract size is how much real-world exposure you take on for each contract bought and sold.
It also determines the leverage. A WTI crude oil futures contract on the CME is for 1,000 barrels. One contract controls $80,000 of oil at $80 per barrel. The margin to hold that position is a fraction of the notional value, and that is exactly where the amplification comes from. Contract sizes are deliberately large enough to price small retail participants out of certain markets, thus keeping them institutional.
Before you trade any derivative, you must know the contract size. It’s non-negotiable. It’s the basis of your position sizing, stop placement and risk per trade calculations.
Example: A trader is looking for crude oil exposure and only wants to risk $2,000 on the move. One CME crude contract equals 1,000 barrels. A $2 adverse move at $80 a barrel costs $2,000, their limit. They scale accordingly, one contract, stop $2 away. That same stop is a very different dollar loss if you get the contract size wrong.
Contracts for difference (CFD)
A derivative product that allows a trader to speculate on an asset’s price movement without owning the underlying. The buyer and seller agree to exchange the difference between the opening price of the asset and the closing price of the asset when the contract is closed out. If the price moves in your favour the counterparty pays you the difference. If it is against you, you pay them.
CFDs offer you access to many markets like equities, indices, commodities, and currencies, from a single account, with leverage and the ability to go short just as easily as long. That’s the attraction, the flexibility. The danger is the same flexibility used irresponsibly. Leverage works both ways, amplifying losses as easily as gains and CFD positions are subject to overnight financing costs that eat into returns on positions held.
CFDs are not allowed for retail clients in the United States. But they are offered across Europe, Asia, Africa and the Middle East, with leverage caps and negative-balance protection rules in place in regulated jurisdictions.
Example: A trader may think that a large airline’s share price will fall before it releases its earnings. They do not short the stock, that is, borrow shares, but rather open a short CFD position. If the stock drops 5%, they make that gain. If it goes up 5%, they absorb the equivalent loss times whatever leverage the broker applied to the position.
Controlled risk
A type of trade or product structure where the maximum possible loss is defined and fixed at the time of entry. No matter how far the market moves against you, the loss cannot be more than the agreed amount beforehand. The other side of an uncontrolled risk trade (uncovered short or leveraged futures trade), where adverse moves can exceed the initial margin and losses exceed the capital deployed.
Controlled risk does not equal low risk. It means known risk, and known risk is easier to quantify and to plug into a portfolio framework. Options are the most obvious example: a long option position can only lose the premium paid, regardless of how badly the market moves. CFD platforms do offer guaranteed stop-loss orders that do something similar, but brokers will charge a premium for the guarantee.
Most professional risk frameworks are built around the idea of controlled risk. If you cannot define the worst-case loss before you enter, then the position is too big or the product is wrong.
Example: A trader buys a put on an index for a premium of $500. The index rallies hard against the position. It’s a worthless option. Total loss: $500.00 exactly. No more, no less, no matter how far the index moved. That is the hard floor of controlled risk. A short futures position has no such floor under the same circumstances.
Convergence
The way a futures contract’s price tends to converge with the spot price of the underlying asset as the contract approaches expiry. The two prices have to be equal at delivery, or there would be a riskless arbitrage that would be quickly taken advantage of by traders until the difference is eliminated.
For traders who roll futures positions, convergence is important. At the end of a contract, spot dynamics prevail. This convergence process over the course of the contract is captured in roll yield, which is positive in backwardation and negative in contango.
Technical analysis refers to convergence as the process of two indicators or related assets coming together after a period of divergence. In the field of macroeconomics, it refers to the property of poorer economies to grow faster than richer ones, so as to lessen the income gap over time. The same word has different meanings in different subjects.
Example: A trader who is long crude oil futures observes the trade of the front-month futures at a small premium, in order to identify with two weeks left before expiry. As the expiries get closer, the futures price slowly creeps to the spot price, meaning a small but definite profit is made as the premium approaches zero, regardless of whether or not the absolute price of the oil changes during the period.
Convergence of mas
When moving averages of different periods converge after having converged. The inverse of divergence. A strong trend is when a fast-moving average (such as the 20-day) is well above or below a slow one (such as the 50-day or 200-day). As the trend weakens and the price action flattens, the faster MA drifts back toward the slower one. That narrowing gap is convergence.
Traders see convergence as an indication of the weakness of the trend. The distance between the moving averages is the trend momentum. As the distance narrows, the momentum decreases. Convergence is not a trading signal; it is context. Other evidence (declining volume, failed breakouts, deteriorating breadth) backs up the case for reducing exposure or looking for a reversal setup.
MACD (Moving Average Convergence Divergence) is the most popular indicator based on this concept. It measures the difference between two exponential moving averages and plots its rate of change.
Example: A commodity that has been trending higher for months has its 20-day moving average well above its 50-day moving average. As price stalls and ranges tighten, the two MAs start to converge. A technical trader is looking at the chart, sees the compression, tightens their trailing stop and waits. The convergence didn’t call the top, but it was a sign that momentum was leaving the trade.
Conversion Rate
A conversion rate in foreign exchange is the price at which one currency can be converted into another. The actual rate that is available will depend on whether the transaction is at the interbank spot rate, a forward rate, or a retail rate with the broker’s spread included.
In the world of digital marketing and e-commerce, conversion rate refers to a completely different thing – the proportion of visitors or leads who take the desired action, such as making a purchase, filling out a form, or signing up. If 3% of your visitors take your desired action, then 3 per 100 visitors will do so.
The underlying logic in both definitions is one of efficiency: a ratio indicating the efficiency of the conversion of inputs to outputs. The FX version is used to measure currency transformation efficiency, while the marketing version is used to measure audience-to-customer efficiency. Both are constantly optimized by the professionals who own them.
Example: A retail forex broker quotes a EUR/USD conversion rate of 1.0785 to a customer while the interbank rate is 1.0800. The 15 pip spread is the broker’s margin, which is the difference between the market rate and the rate that the customer receives, and is not a visible transaction fee.
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