How to trade CFDs: A beginner’s guide

Contracts for difference, or CFDs, are one of the most popular ways to trade. This page takes you through a step-by-step guide on how to trade them yourself and explains the benefits of doing so.
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Updated: Jan 9, 2024
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This guide is dedicated to the art of trading CFDs. Learn about the unique features of CFDs and the key factors that you should consider before buying one. If you aren’t familiar with what CFDs are or how they work, then you might want to start with our investing guide and CFD definition that goes through those questions in more detail before reading on.

Compare the best CFD trading platforms

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Before you start trading, you need to sign up for a CFD broker that can execute your trades for you. Lots of platforms let you buy and sell CFDs, and you can get started with any of the options below simply by following the links in the table.

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1
Min. Deposit
$ 100
Best offer
User Score
9.9
Offre spéciale limitée - 0% de commission et 0% de droits de timbre sur TOUS les stocks!
Plateforme primée - achetez des actifs physiques ou négociez avec effet de levier
Plus de 11 méthodes de paiement, dont PayPal
Start Trading
Payment Methods:
American Express, Apple Pay, Carte de crédit, Carte de débit, Discover, Google Pay, Ideal, Klarna, Maestro Master, Mastercard, POLi, Przelewy24, Rapid Transfer, SEPA, Sofort, Trustly, Virement, Virement bancaire, Visa, Visa Electron, , , , , , , ,
Full Regulations:
ASIC, CySEC, FCA

Cryptocurrency is offered by eToro USA LLC (“the MSB”) (NMLS: 1769299) and is not FDIC or SIPC insured. Investing involves risk, and content is provided for educational purposes only, does not imply a recommendation, and is not a guarantee of future performance. Invezz.com is not an affiliate and may be compensated if you access certain products or services offered by the MSB.

2
Min. Deposit
$ 0
Best offer
User Score
9.7
Start Trading
Payment Methods:
Carte de crédit, PayPal, Virement,
Full Regulations:
CNVM Romania, CySEC, FCA, IFSC
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
3
Min. Deposit
$ 100
Best offer
User Score
9.9
Ouvrez un compte MT5 pour être long ou court sur 250 des plus grandes actions américaines, australiennes et européennes
Instruments dans 21 délais et 80 indicateurs pré-installés
Réglementation multijuridictionnelle par ASIC et VFSC
Start Trading
Payment Methods:
Carte de crédit, Crypto-monnaies, PayPal, Virement bancaire, ,
Full Regulations:
ASIC, CySEC, FCA
74-89% of retail CFD accounts lose money

How to trade using CFDs – a step-by-step guide

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The act of trading is relatively simple and it doesn’t take long to get to grips with. Follow this process in order to make your first trade.

  1. Sign up with a CFD broker. You need a broker in order to make trades. Each platform has its own unique features and you should choose one that most closely matches how – and what – you want to trade. You can compare their offerings by reading through our in-depth reviews.
  2. Set a budget. It’s best to decide on an amount which you are willing to lose in advance, so that you aren’t tempted to keep pouring money in if things go wrong. You can get started with a small amount of money, usually as little as the broker’s minimum deposit, which can be £50 or less. 
  3. Create a trading strategy. CFDs allow you to buy or sell different assets (known as going ‘long’ or ‘short’), so you need to set up some rules to tell you when you should make a move, and which way. Most traders spend a lot of time analysing price charts to find patterns that help them decide when to buy or sell a CFD.
  4. Find an opportunity. You can trade CFDs on a range of assets, such as stocks, indices, commodities, currencies, and cryptocurrencies. Pick your market and then choose an individual CFD, based on the trading indicators you have set up or your own research.
  5. Open your position. Select the CFD and whether you want to buy or sell it. Then decide on a position size, set any stop-loss or limit orders (these are prices at which you want to automatically close the position in order to reduce the risk from extreme market moves), and execute the trade. Once you’ve done so it will show up in the ‘open positions’ section of your account.

What are CFDs?

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They are contracts that represent a financial asset, such as an individual stock or cryptocurrency. Each CFD mimics the price of the asset that it represents, so they allow you to speculate on how the price might change without ever owning the asset itself. 

This type of contract is known as a ‘derivative’, which just means that it gets its value from an underlying asset. Its price fluctuates in the same way, and it gives the trader the option to benefit from the changes by shorting them or using leverage, features which aren’t (normally) available when you buy the asset outright.

Key factors to consider

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CFDs have some unique features that it’s worth looking out for when you start trading. Here is a quick look at the most important ones, along with some practical advice about what they mean for you.

Whether you want to go long or short

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The terms ‘long’ and ‘short’ simply refer to buying and selling an asset, respectively. With CFDs you can do both, and the right approach depends on how you expect the price to move. If you go long (buy) and the price goes up, you make a profit based on the difference, and the reverse is true if you sell (short) and the price goes down.

This also means that you can use CFDs as part of a strategy based on regularly buying and selling assets as their price moves up and down, often over the course of a single day. In most cases, this strategy goes hand-in-hand with an analysis of price charts to find trends that indicate which way a price is likely to move.

Fees and spreads

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Many brokers offer free trading on CFDs, but you might have to pay a fee or commission with others. Even if the trading is free, it’s likely that your broker makes its money in other ways. Often, it does so on the difference between the ‘buy’ and ‘sell’ price – known as the ‘spread’. The larger the gap between the two figures, the bigger the spread, and the bigger the broker’s cut. Compare the fees and spreads on different platforms to find the best value.

Whether to use leverage

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Leverage is the practice of using a small amount of money as a deposit – referred to as ‘the margin’ – in order to open positions many times bigger. It’s very common when it comes to trading CFDs, and brokers may let you make trades up to 10x (or more) the value of your deposit.

It’s a risky strategy, as multiplying the size of your trade also increases your potential losses. Although many traders use it, think carefully before you join them, and consider whether it’s appropriate for the asset you’re interested in. Cryptocurrencies, for example, are much more volatile (and therefore risky) than the forex market, where it’s standard practice to open positions with lots of leverage because currency price fluctuations are so small.

Top 3 CFD trading strategies

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Trading news with CFDs

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It is no secret to anyone that economic, political, social and cultural events can have a great impact on the prices of financial assets. For this reason, one of the most common CFD trading tips is to pay attention to the news in order to anticipate potential price changes. Although the effects of news tend to be felt in the long term, you should never rule out the possibility that an event will have immediate consequences on the volatility of an asset.

Luckily, most important news for the financial markets is scheduled in advance, so you can be prepared for these events. Among the most important data that you should take into account are:

  • Interest rates
  • Unemployment figures
  • Inflation
  • Balance of trade
  • Manufacturing production
  • GDP

In order to take advantage of this news, you can use an economic calendar. These calendars feature past, expected and actual values for the most important news. If, for example, the expected value varies considerably from the actual value, you can expect volatility in the market. And it is precisely in periods of high price fluctuations where you can make profits with CFDs.

Let us now look at an example of this CFD trading strategy. One of the most important reports is the non-farm payrolls of the United States, since it is considered one of the most reliable indicators of the economy of that country. To use this report to your advantage, use a Forex calendar to see expected values. Once the report comes to light, compare the actual value with the expected one. If it is very different, you can expect a lot of volatility in the market, so you should open positions.

Hedging

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This is a CFD trading strategy for beginners that aims to prevent losses or secure profits on other positions in the financial markets. Unlike many other strategies, hedging is not intended to make a profit, but to protect a loss or save a position from excessive market volatility.

To hedge, you basically need to open a position opposite the one you want to hedge. For example, if you want to protect profits from a long trade, it means that you open a short trade, usually with the same financial instrument.

One of the great advantages of financial hedges is that they allow you to operate without risk once you reach a certain profit. Imagine that you have a CFD with a profit of 5%. In this case, you could hedge another CFD and stay in the market while locking in that 5% profit.

Go short and long with CFDs

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The last of the CFD trading systems that we will talk about in this article has to do with the two basic positions in the market: long and short. Many people believe that with CFDs, just like with shares, it is only possible to make profits in rising markets. However, CFDs offer the possibility of making profits in both uptrends and downtrends.

CFDs are contracts, so all that is needed is two parties willing to trade. If you buy one of these contracts, at the time of selling it you have to find a counterparty willing to accept your selling price. Liquidity providers take care of this. The same applies to the case of purchase.

This means that you can go short assets that normally do not allow it, such as stocks. Such a feature of CFDs opens up a new world of possibilities in financial trading. For example, you can expand your investment portfolio and hedge different asset classes.

Why use CFDs?

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They are more flexible and have fewer limits than buying or selling assets outright. It’s usually cheaper to trade CFDs, so you can do so more often as part of a trading strategy that requires a lot of activity to make money, such as day-trading. They’re also easier to use, and you can simply sign up to a broker and make a trade in a few minutes.

Those factors have made them extremely popular as a trading tool, and they offer up many more ways to trade as well. As you can buy and sell CFDs, you can use them to speculate on price moves in either direction, and you can use leverage in order to afford assets that might otherwise be out of your reach, or to spread your money more widely.

Still undecided?

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This guide has been packed full of information so, to help you come to a final decision, here’s a quick summary of the pros and cons of CFD trading.

Pros

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  • They are a simple way to speculate on virtually any asset you want
  • CFD trading is often free and you can make moves at any time of day
  • You can buy and sell them in order to take advantage of price falls as well as rises
  • CFD brokers let you use leverage to open bigger positions

Cons

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Start trading CFDs now


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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.