How to Trade CFDs: Learn CFD Trading With Examples

To trade CFDs in the UK, open an account with an FCA-regulated broker, deposit funds, and choose an asset to trade. You can buy (go long) if you expect prices to rise or sell (go short) if you expect them to fall. Use stop-loss orders and understand leverage and margin before trading, as CFDs are high-risk products.

CFD trading lets you speculate on price movements of assets like stocks or forex without owning them. In the UK, it’s FCA-regulated, ensuring broker safety and transparency.

You can go long (buy) if you think a price will rise or go short (sell) if you expect it to fall. For example, buying a gold CFD at £1,900 and closing at £1,950 earns profit on the £50 move.

Start with FCA-regulated brokers such as eToro, XTB, or IG, and use a demo account to practise first.

This article was reviewed by Tobi Opeyemi Amure, a trading expert and writer at Investopedia, Investing.com, and Trading.biz.

How to trade CFDs

Trading Contracts for Difference (CFDs) lets you speculate on price movements of assets without owning them.

Follow these steps to trade CFDs safely and effectively in the UK:

1. Choose an FCA-regulated CFD broker

Start by selecting a trusted, FCA-regulated platform such as eToro, XTB, or IG. FCA oversight ensures client fund segregation, transparent pricing, and access to the Financial Services Compensation Scheme (FSCS) if applicable.

Compare each broker’s spreads, commissions, leverage limits, and available markets before opening an account.

2. Open and verify your account

Complete the broker’s sign-up process and verify your identity under KYC (Know Your Customer) rules. You’ll need proof of identity and address.

Next, fund your account using a secure method such as bank transfer, debit card, or PayPal. Some brokers offer demo accounts to practise with virtual funds before trading live.

3. Select your market and asset

CFDs cover a wide range of assets, including forex, shares, indices, commodities, ETFs, and crypto.

Research market conditions and use your broker’s charting tools to assess price trends, volatility, and support or resistance levels. Beginners often start with major indices or blue-chip stocks for lower volatility.

4. Decide your trade direction

• Go long (Buy): if you expect the asset’s price to rise.
• Go short (Sell): if you expect the price to fall.
  For example, if you buy a gold CFD at £1,900 and sell at £1,950, you profit from the £50 difference, multiplied by your position size.

5. Set your trade size, leverage, and margin

CFD trading uses leverage, allowing you to control a larger position with a smaller deposit.

In the UK, FCA limits leverage to 30:1 for major currency pairs and lower for other assets.

Always check margin requirements and ensure you understand how leverage magnifies both profits and losses.

6. Apply risk management tools

Use stop-loss orders to cap potential losses and take-profit orders to automatically close winning trades.

Avoid over-leveraging and limit your exposure to 1–2% of your account balance per trade. Many brokers also offer negative balance protection, preventing you from losing more than your deposit.

7. Monitor and close your position

Once the trade is live, track it using your broker’s dashboard or mobile app. Prices can move quickly, especially during news releases.

You can close your position manually at any time, or it will close automatically if your stop-loss or take-profit level is triggered.

8. Review and improve your performance

After closing trades, review your results and note what worked or didn’t.

Use your broker’s analytics tools or a demo trading account to test new strategies before applying them live. Keeping a trading journal helps identify patterns and improve discipline over time.

CFD trading examples

Here are a few examples of trading CFDs.

Share CFD trade example

Let’s consider a hypothetical example of a share CFD trade to illustrate the process:

Scenario:

• Asset: ABC Technology Shares
• Current Market Price: £100 per share
• Trader’s Analysis: The trader anticipates that ABC Technology shares will increase in value due to a forthcoming product launch.

Trade Execution:

1. Opening the Position:
   • The trader decides to buy CFDs in ABC Technology.
   • Position Size: Buys 50 CFDs (equivalent to 50 shares).
   • Opening Price: £100 per share.
   • Total Exposure: 50 CFDs x £100 = £5,000.
2. Leverage and Margin:
   • The broker offers a 10:1 leverage for share CFDs.
   • Margin Requirement: 10% of the total exposure.
   • Margin Paid: 10% of £5,000 = £500.
3. Risk Management:
   • Stop-Loss Order: Set at £95 per share to limit potential loss.
   • Take-Profit Order: Set at £110 per share to secure potential profit.

Market Movement:

• After the product launch, the share price rises to £110 per share.

Closing the Position:

• The take-profit order triggers and the position is closed at £110 per share.

Profit Calculation:

• Closing Price: £110 per share.
• Profit per CFD: Closing Price (£110) – Opening Price (£100) = £10.
• Total Profit: £10 x 50 CFDs = £500.

Outcome:

• The trader realises a profit of £500 on the trade, excluding any trading fees or overnight charges.
• The profit is realised with an initial margin of just £500, demonstrating the impact of leverage.

This example highlights how share CFD trading works, the role of leverage and margin, and the importance of risk management tools like stop-loss and take-profit orders.

Remember, this is a simplified scenario for illustrative purposes, and real trading involves risks and complexities.

Forex CFD Trade Example

Let’s explore a hypothetical example of a Forex CFD trade to understand how it works:

Scenario:

• Currency Pair: EUR/USD
• Current Exchange Rate: 1.1200 (i.e., 1 Euro = 1.1200 US Dollars)
• Trader’s Analysis: The trader predicts the Euro will strengthen against the US Dollar due to favorable economic news from the Eurozone.

Trade Execution:

1. Opening the Position:
   • The trader decides to buy EUR/USD CFDs.
   • Position Size: Buys 10,000 units (CFDs).
   • Opening Rate: 1.1200.
2. Leverage and Margin:
   • The broker offers 30:1 leverage for Forex CFDs.
   • Margin Requirement: Approximately 3.33% of the total exposure.
   • Margin Paid: 3.33% of the total value of 10,000 Euros (at 1.1200 USD per Euro).
3. Risk Management:
   • Stop-Loss Order: Set at 1.1150 to limit potential loss.
   • Take-Profit Order: Set at 1.1300 to secure potential profits.

Market Movement:

• Following the economic news, the EUR/USD rate rises to 1.1300.

Closing the Position:

• The take-profit order activates, and the position is closed at the rate of 1.1300.

Profit Calculation:

• Closing Rate: 1.1300.
• Profit per Unit: Closing Rate (1.1300) – Opening Rate (1.1200) = 0.0100 USD.
• Total Profit: 0.0100 USD x 10,000 units = 100 USD.

Outcome:

• The trader realises a profit of 100 USD from this trade, excluding any brokerage fees or overnight financing costs.
• The profit is achieved with a significantly lower capital investment due to leverage.

This example illustrates the process of a Forex CFD trade, highlighting the use of leverage, the importance of risk management through stop-loss and take-profit orders, and the potential for profit from currency movements.

As always, it’s important to remember that real Forex CFD trading carries risks, and market conditions can change rapidly.

Final thoughts

CFD trading exceeded $300 billion in volume in early 2023¹, showing its growing popularity among both new and experienced traders.

CFDs let you speculate on price movements without owning assets, offering flexibility and potential returns. However, they carry high risk, especially due to leverage and rapid market swings.

To trade effectively, learn the basics, use an FCA-regulated broker, apply risk management tools, and review your strategy regularly.

FAQs

More CFD guides:

• Best CFD trading platforms UK

Sources:

1. https://capital.com/pulse-q1-2023 ↩︎