How To Trade CFDs
Welcome to Trading Brokers step by step guide to trading CFDs online. Here you will find an easy to understand explanation of CFD trading. This includes how to trade CFDs online, what you need to trade CFDs and how to open a trading account with a CFD broker so that you can start trading CFDs online today.
Trading with CFDs has become a popular strategy in recent years. The range of online brokers and availability of leverage along with competitive costs of CFD trading make it a viable option for active traders. Perhaps you have heard about CFDs and would like to learn more. This CFD trading guide can help you along your journey.
What are CFDs?
Contract for difference (CFDs) enable traders to speculate on price movement without actually physically owning the underlying asset. They can buy and sell trading instruments from various markets such as forex, stocks, indices, commodities, cryptocurrencies and more. This is conducted via a contract between the client (trader) and broker without requiring any forex, stock, commodity, or futures exchange.
When you trade CFDs, you buy a certain number of contracts on a market if you expect its price to rise, and sell them if you expect it to fall. The difference in the market price of the CFD from when you placed the buy or sell trade, is the profit or loss, excluding any broker spreads and fees.
Where to trade CFDs?
In order to trade CFDs online, you will need to open a trading broker account. You can see a selection of our best CFD brokers below with whom you can open a trading account to buy and sell CFDs online.
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
What is CFD trading?
CFD trading if considered by many to be more simplistic when compared to some other complex trading strategies. An individual can buy or sell a CFD depending on if they believe that the underlying asset will increase or decrease in price throughout the duration in which they hold the contract. The difference in the price of the CFD from the position entry and exit, is the trader’s profit or loss.
For example, if a trader thought that the price of the EURUSD currency pair would increase, they could place a buy trade. If the EURUSD price increased and they closed their position, the profit would be the difference in the price from when they entered trade, minus the spread and any broker commission fees. However, if the EURUSD fell in value and the trader closed the position, they would have made a loss.
When trading CFDs online, you will be presented with the buy price (bid) and sell price (ask). These prices are based on the underlying instruments that you are dealing with in the CFD contract.
The buy price will usually be higher than the sell price. The difference between these prices is known as the spread. The majority of CFD trades executed through a broker will be charged the spread, although this is not the case with all asset classes.
Some brokers include a commission fee in addition to the spread. There can also be other fees such as swap fees for holding trades overnight. It is important to be away of all brokerage fees when trading CFDs as they can have an impact on your trading strategies, especially if you are an active trader looking to place trades on a frequent basis.
If you are trading CFDs, you will need to decide how many contracts it is that you wish to enter for each position. Each market and broker can have a minimum requirement, usually from one contract. On a standard account, one contract is around $10 per point. Some brokers will allow micro/mini contracts where you can trade from $1 or even $0.1 per point. This can give you more flexibility on your trades and allow you to control your risk exposure accordingly.
It is worth keeping in mind that CFDs can be leveraged which means that you can control a position size larger than your balance would have been able to without it. For example, an account of $5,000 with 1:30 leverage, could control a position size of $150,000 ($5,000 x 30 = $150,000).
Whilst this may seem appealing as a leveraged position can improve potential gains, it also significantly increases risk exposure and the potential loss. It is therefore imperative that anyone considering trading CFDs, has a full understanding of what leverage is and the risks involved with trading online.
Stops & limit orders
Traders can use a stop loss to help restrict the potential loss on a CFD trade. You place a stop loss at a price where you would want the position to be closed should it move against you by the specified amount. You can also manually close a CFD trade before the stop loss is reached.
Basic stop losses may be affected if there is a market gap which can occur during volatile market conditions or overnight. Some brokers offer guaranteed stop losses for a premium which will close a trade at your requested price level. There are also trailing stops that can lock in your position and follow price when the market moves in your favour.
Limit orders do the opposite to stop orders. You can place a limit order at a desired price to close a trade if the market moves in your direction. This can be a useful way to secure profits, especially in volatile markets. You may also choose to manually close a position in profit before the limit order is reached.
CFD trade example
An individual wants to trade CFDs on a stock that has an asking price of $35 and opens a CFD with a value of 100 shares.
Using the traditional method of trading shares, the cost would be $3,500 including any commission and other fees.
If they were using a CFD broker that had a leverage of 1:20, they would be able to enter the trade with an account size of $175. This is because $175 x 20 = $3,500.
This makes trading CFDs an attractive prospect for active traders but can also cause unnecessary losses for the less informed traders. Many brokers have restricted leverage due to regulations and to try and protect traders from themselves.
In the example above, let’s consider the value of the underlying stock increased to a price of $36.
If you owned the stock, your holding is now worth $3,600. The realised profit is $100 excluding any commission or trading costs.
However, with the underlying stock at $36.00, the CFD would show the same $100 profit but initially required juts $175 to open the position.
Therefore, in terms of percentage, the CFD had a much greater return. Although if the market had moved the other way, the losses relative to the initial investment would also have been much larger on the CFD. This emphasises the impact of leveraged trading on both the risk and reward of a trade.
Why trade CFDs?
Trading CFDs offers several major advantages that have increased the instruments’ rapidly growing popularity over recent years. With the ability to trade short or long on various markets, use leverage and access thousands of instruments, some trading 24 hours a day, investors are taking advantage of the versatility of CFDs as a way to diversify their investment portfolio.
How to trade CFDs online?
If you have taken the time to read through the above, you should hopefully have an understanding of how to trade CFDs. Here is a summary of the key steps:
1. Decide if CFD trading is for you
Trading CFDs online carries an element of risk and can take more time than other forms of investing. You will need to research CFDs, manage your CFD positions, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with trading CFDs online.
2. Educate yourself
Before trading CFDs, it is imperative to learn as much as possible about investing and CFDs in particular. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online CFD brokers that can help you to improve your trading skills and knowledge.
Most CFD brokerages will also provide a free demo trading account so that you can practice trading CFDs online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.
3. Choose a CFD broker
In order to trade CFDs online, you will need a broker account and CFD trading platform to execute your CFD trades. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.
If you do not have the time to research brokers, you can see a list of our best CFD brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
4. Research CFDs
If you have made it this far then you may be ready to start trading CFDs online! The next step is to research the different markets to see which you have an interest in trading. Perhaps there is a particular industry, product or service that is already of interest to you. Many brokers will allow you to filter CFDs according to various criteria in order to narrow down your search if need be.
5. Have a CFD trading plan
Some of the most important factors that can help determine CFD trading performance can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.
6. Buy and sell CFDs
Once you know what CFDs you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing a CFD trade, you will need to keep track of how it performs and manage it according to your trading plan. Some traders will keep hold of CFDs for the long-term, whereas others may buy and sell CFDs on a daily basis.
Is CFD trading right for me?
CFD trading is a popular choice for active investors who would like to trade leveraged positions with access to buy and sell thousands of trading instruments around the clock. CFD trading can be suitable for scalping, day trading and swing trading.
However, it is important to understand the significant risks involved with trading CFDs online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to trade CFDs and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most CFD brokers provide unlimited demo accounts free of charge.
Not sure which CFD broker to trade online with?
If you are still unsure which CFD broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare CFD brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best stock brokers, best trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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