Wondering how to trade CFDs?
CFD trading involves speculating on financial markets like shares, indices, commodities, and forex without owning the underlying assets.
My guide provides a step-by-step walkthrough from account opening to trade execution, offering practical examples and essential insights for those starting in CFD trading.
Quick answer: how to trade CFDs? To trade CFDs, you’ll first need to open an account with a CFD broker that is regulated by the Financial Conduct Authority (FCA). After depositing funds, you can select the asset you want to trade and open a position by either ‘buying’ if you expect the asset to rise in value or ‘selling’ if you expect it to fall. Always make sure to use risk management tools like stop-loss orders and take the time to understand the leverage and margin requirements, as CFD trading is high risk.
How to Trade CFDs in Six Steps
- Learn what CFDs are: Learn how CFDs work, their basics, and how they are different from other financial products.
- Open a CFD account: Choose a regulated CFD broker, sign up, and consider starting with a demo trading account.
- Choose a CFD market: Choose a CFD market you want to trade. Options in the UK include shares, forex, indices, commodities, ETFs, and more.
- Decide to buy or sell: Click ‘buy’ if you think your market will increase in value, or ‘sell’ if you think it will fall.
- Set up and execute your trade: Choose how many CFDs to buy or sell, and add a stop or limit order loss. Then open your position.
- Monitor and close your trade: Now your position is open, you will see your profit/loss update in real-time. You can exit it by clicking the close trade button.
Now, I’ll go into more detail about each step.
1. Learn what CFDs are
CFD trading, or trading Contracts for Difference, is a method of speculating on financial markets without owning the underlying assets.
These derivatives allow traders to predict and profit from price movements of assets like stocks, commodities, and forex.
For instance, if you anticipate an increase in a technology stock’s value, you could open a CFD position that profits if the stock price rises, without actually owning the stock.
Conversely, you can ‘go short’ and profit from a falling market. It’s crucial to understand that while CFDs offer the potential for high returns, they also carry significant risks, especially due to leverage, which can amplify both gains and losses.
Your first step in CFD trading is to understand how it works. Read my complete introduction to get started: what is CFD trading & how does it work?
2. Open a CFD account
To engage in CFD trading, the first practical step is opening a CFD trading account. Choose a broker regulated by a relevant authority, like the FCA in the UK, to ensure credibility and safety.
Pay attention to security measures such as data encryption and segregated client accounts to protect your investments.
Brokers typically offer demo accounts for practice, allowing you to familiarise yourself with the platform using virtual funds.
When assessing brokers, compare their fee structures, including spreads, commissions, and any additional charges, to find one that aligns with your financial strategy.
Also, consider the variety of account types available, selecting one that suits your trading style and experience level. Before finalising your choice, using demo accounts from multiple brokers can help you make an informed decision based on hands-on experience.
I’ve scrutinised and reviewed the best CFD brokers in the UK here. I recommend Plus500 for beginners.
3. Choose a CFD market
Selecting the right asset type is a pivotal step in CFD trading, closely tied to your individual trading goals and style.
CFDs offer a range of assets, including shares, commodities (like silver or wheat), global indices, currency pairs, bonds, and more. Each category has distinct characteristics, such as volatility and liquidity, which should match your strategy and risk tolerance.
For instance, currency pairs might appeal to those seeking 24-hour trading and high liquidity, while commodities could be better for longer-term trends based on economic factors.
It’s important to research and understand each market’s specific dynamics, including historical performance and potential future influences on prices. Your choice should balance your objectives with your comfort level regarding the asset’s market behavior.
4. Decide to buy or sell
In CFD trading, making the decision to buy or sell is fundamental. This decision hinges on your analysis and prediction of the market’s direction.
CFD markets offer two key prices: the sell (bid) price and the buy (offer) price, with the difference between these two known as the spread. The sell price is usually set slightly below the market price, while the buy price is slightly above.
Your trading decision should be based on your market predictions. If you expect the value of an asset to rise, you would take a ‘long’ position by buying. Conversely, if you anticipate a decline, you would ‘short’ the market by selling, aiming to profit from the decrease in value.
Understanding leverage is crucial in this step. Leverage allows you to open a position with a fraction of the trade’s value, known as margin.
However, it’s important to remember that while leverage can magnify profits, it also increases potential losses as they are calculated based on the full trade size.
Therefore, it’s vital to carefully consider the implications of leverage and the spread before executing a trade.
5. Set up and execute your trade
After choosing your market and position (long or short), the next crucial step is to set up and execute your trade.
Begin by determining the size of your position, which involves deciding on the number of contracts to buy or sell. This decision should be based on your capital, risk tolerance, and the specific tick value of the asset you’re trading.
Leverage plays a key role in CFD trading, allowing you to control a large position with a comparatively small amount of capital, known as margin. It’s important to ensure that your account has sufficient funds to cover this margin, keeping in mind that while leverage can amplify profits, it also increases potential losses.
Risk management is vital in CFD trading. Implementing stop-loss orders can help limit potential losses by automatically closing the trade if the market moves unfavorably.
Conversely, setting take-profit orders can lock in profits by closing the trade when it reaches a desired price level.
Finally, execute your trade. Once you’ve established your position size, leverage, and risk management orders, you can confidently place your trade.
Remember, continuous monitoring of your position is crucial as market conditions can change rapidly, requiring adjustments to your strategy.
6. Monitor and close your trade
Once your CFD position is active, it’s crucial to monitor it closely. Your profit and loss will fluctuate in real time based on the underlying market movements.
You can track these changes and manage your position through your trading platform, whether on a computer or a mobile app.
If you didn’t set stop-loss or take-profit orders initially, it’s advisable to add them now. These tools are essential for managing risk and securing profits by automatically closing the trade at predetermined price levels. Adjust these orders as needed to adapt to changing market conditions.
Closing your trade involves a reverse action of your opening move. For example, if you opened a position by buying 100 CFDs, you would close it by selling the same amount. This can be done manually or by using the ‘close position’ feature in your trading platform.
Your account balance will be immediately updated to reflect the profit or loss from the closed position. To manually calculate your profit or loss, subtract the opening price from the closing price (or vice versa for short positions) and multiply by your position size, taking into account any trading costs.
Monitoring your trade is an ongoing process, requiring continuous evaluation of market conditions and your position’s performance. Close the trade when it aligns with your strategy or if market analysis suggests it’s no longer beneficial to keep it open.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- Closing Price: £110 per share.
- Profit per CFD: Closing Price (£110) – Opening Price (£100) = £10.
- Total Profit: £10 x 50 CFDs = £500.
- 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:
- 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.
- Opening the Position:
- The trader decides to buy EUR/USD CFDs.
- Position Size: Buys 10,000 units (CFDs).
- Opening Rate: 1.1200.
- 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).
- Risk Management:
- Stop-Loss Order: Set at 1.1150 to limit potential loss.
- Take-Profit Order: Set at 1.1300 to secure potential profits.
- 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.
- 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.
- 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.
The best way to understand how to trade CFDs is through seeing a video walkthrough, here’s a good example by the UK broker IG:
CFD trading volume reached more than $300bn in Q1 20231, highlighting the popularity and opportunities for both beginner and experienced traders.
Trading CFDs offers traders flexibility and the potential for high returns without the need to own the underlying asset.
By understanding the basics, setting up a trading account, choosing the right asset, deciding when to buy or sell, executing trades with proper risk management, and monitoring positions closely, traders can navigate the CFD market effectively.
However, it’s essential to remain aware of the risks, especially those associated with leverage, and to engage in continuous learning and strategy refinement.
As you gain experience, your ability to make informed decisions in response to market movements will improve, potentially leading to more successful trading outcomes.
Remember, while CFD trading can be profitable, it requires a strategic approach and disciplined risk management.
How do I place a CFD trade?
To place a CFD trade, first choose an asset, decide whether to go long (buy) if you predict a price increase, or short (sell) if you expect a price decrease. Then, open your trade through a trading platform by setting your position size, applying any necessary leverage, and establishing stop-loss and take-profit orders to manage your risk.
What markets can I trade with CFDs?
With CFDs, you can trade a wide range of markets including forex, stocks, indices, commodities, bonds, and more. This variety allows traders to speculate on price movements across global markets without owning the underlying assets.
What’s the difference between CFDs and investing?
CFDs, or Contracts for Difference, allow traders to speculate on the price movement of assets without owning them, often using leverage. Investing typically involves purchasing and holding assets with the expectation of long-term value appreciation. CFDs offer the potential for short-term gains and enable positions on falling prices through short selling, which is not typically a feature of traditional investing.
Who can trade CFDs?
CFD trading is available to individual retail traders, institutional investors, and professional traders who have access to a trading platform and meet the broker’s requirements. It is suitable for those with a good understanding of the financial markets and a high tolerance for risk, given the leverage and volatility involved.
What is a CFD account?
A CFD account is a trading account that traders use to engage in Contracts for Difference (CFDs), allowing them to speculate on the price movement of financial assets. It is provided by CFD brokers and gives access to trading platforms where traders can open, manage, and close their positions on various markets.
How much does it cost to trade CFDs?
The cost to trade CFDs typically includes the spread, which is the difference between the buy and sell price, along with any applicable commission fees or overnight financing charges (also known as swap rates). Some brokers may also impose additional fees for account inactivity or withdrawal. Costs vary by broker and the underlying asset being traded.
How do you trade CFDs successfully?
To trade CFDs successfully, one must have a thorough understanding of market trends, employ sound risk management strategies including the use of stop-loss and take-profit orders, and maintain discipline in following a well-researched trading plan. Continuous learning, adapting to market conditions, and managing emotions are also key aspects of achieving long-term success in CFD trading.
How to trade CFDs for beginners?
Beginners looking to trade CFDs should start by acquiring knowledge about how CFDs work, including understanding leverage and risk. It’s essential to practice trading with a demo account, develop a trading strategy with clear goals, and use risk management tools like stop-loss orders before transitioning to a live trading environment.
Is CFD trading profitable?
CFD trading can be profitable, but it carries a high level of risk due to leverage and market volatility. Success in CFD trading depends on the trader’s knowledge, strategy, risk management practices, and market conditions. However, it’s important to note that profits are never guaranteed and losses can exceed initial investments.
Is CFD trading legal in UK?
CFD trading is legal and regulated in the UK. The Financial Conduct Authority (FCA) is the regulatory body responsible for overseeing CFD trading and ensuring compliance with relevant laws and regulations. Traders can engage in CFD trading with authorised and regulated brokers that operate in accordance with the FCA’s guidelines. It’s important for traders to choose reputable brokers and stay informed about any changes in regulations to ensure compliance and protect their interests while trading CFDs in the UK.
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