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CFD trading is a great alternative to traditional trading for modern traders who want a faster-paced, more active, and diverse market. It also has a low barrier to entry, which is incredible.
However, since the financial market has a balanced scale of opportunities and risks, getting started the right way can make all the difference. In this post, you’ll learn how to start trading CFDs and everything surrounding it.
What is CFD Trading and How it Works
CFD stands for Contract for Difference, and while it’s going through an almost resurgence, it has been around since the 1990s as a type of financial derivative. This makes it now close to being four decades old. It’s a type of trading where you don’t actually have to own any assets, but simply speculate on the price movement of these assets and profit from that.
This form of trading works upon the concept of a contract that you, the trader, enter into with a broker. This contract allows you to profit (or bear a loss) based on whether your prediction about an asset’s price movement was accurate. In CFDs, the difference in price determines the profits or losses. If the price moves in your favor, you make a profit. If it moves against you, you take a loss. Fairly straightforward.
To understand this better, let’s assume you think Amazon’s stock price will rise. In traditional trading, you would first have to own Amazon stock to trade it. Here, you open a CFD trade with your broker at, hypothetically, $200 per share. If the stock price increases to $300, you earn the $100 difference per share. However, it works both ways. If the price drops to $100, you lose $100 per share.
Another major difference is that, since you’re predicting the price movement and gaining profits from the difference, you can trade within both bearish and bullish markets. The same is possible in traditional trading, but short-selling is complex and requires borrowing. In CFD trading, it’s quite common.
Also, be sure to learn the difference between CFD broker vs Crypto exchange.
The Role of Spreads, Margins, and Leverage
The key components that make these trading instruments different are margins and leverage. Spread refers to the difference between the buy price and the sell price. The tighter the spread, the less the price needs to move before you start making a profit.
Leverage and margin are where things get interesting, complex, and different. In CFDs, you can open a large trade without a large deposit. Instead of paying the full price of an asset, you only put down a fraction of the cost. This is called your margin requirement. What lets you control the large trade is called leverage.
For example, with 10:1 leverage, you only need $100 to control a $1,000 trade. As you can assume, this means the potential gains from a mere $100 deposit in this $1,000 trade are massive, but the risks are equally high. Leverage always cuts both ways, so keep that in mind.
CFDs allow you to trade across different markets from a single platform, including but not limited to stocks, forex, commodities, indices, and cryptocurrencies.
How to Start Trading CFDs: Step-by-Step
Now that we know how CFDs work, let’s learn how to start trading them in a few simple steps.
1. Choose a Suitable CFD Broker
To begin, you’re going to need a trading account with a reputable trading platform. This may not jump out as a big deal, but choosing the right broker and platform matters. Ideally, you’ll want one that offers features like high leverage, risk management tools, and access to trading software.
To help you with your search, we recommend our platform - XBTFX.
It is the ideal platform for those starting in CFD trading. Why? Because you can benefit from having a low-fee online broker with tight spreads, multiple types of account options (including an Islamic account), high leverage (up to 500:1), access to 10k+ markets, and platforms like MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader.
Not to forget, you get to be part of a community that’s filled with new and experienced traders sharing their successful strategies for you to learn from. There’s also a wealth of educational materials, including tutorials, webinars, and articles designed to equip you with the necessary knowledge to be successful.
And if you ever feel stuck, our support team is available 24/7 via live chat.
2. Open Your Account
The next step is to open your account with your CFD broker platform. It’s recommended to start with a demo account to practice risk-free using virtual funds, but if you wish, you can also go straight to a live account with real money involved.
Once you’ve signed up to XBTFX, you should see a dashboard. From the side menu, click on Platforms, and then choose either cTrader or MT5. Both are feature-rich trading platforms, so you can select one to begin. Go ahead and click on Create New Account.
Next, you’ll have the option to create a Live or Demo account. Again, it’s best to start with a demo account for beginners, so we’ll go with that option.
After clicking on the Demo tab, click on Product, and select the only option from the dropdown menu. You’ll notice all the other fields will be entered automatically, so go ahead and finish the form-filling process.
3. Pick a Market to Trade
Now, let’s get to the meat of the matter. Having a solid trading platform would help make this process much easier, as it will allow you to pick the market and execute the strategy of your liking. Here are some of the popular CFD markets:
- Forex trading is when you trade currency pairs like EUR/USD or GBP/JPY, capitalizing on fluctuations in exchange rates.
- Commodities such as gold, oil, or agricultural products.
- Cryptocurrencies like Bitcoin and Ethereum.
Analyzing CFD Markets
For any strategy (we’ll get to those) to be successful, properly analyzing the CFD market is necessary. There are primarily three types of analysis you can perform: fundamental analysis, technical analysis, and sentiment analysis.
- Fundamental analysis focuses on the overall health and performance of an asset. This includes gauging its popularity, earnings reports, news releases, and industry trends to predict its price movement.
- Technical analysis involves examining price charts and patterns based on historical data. Tools like moving averages and support/resistance levels are often used here.
- Sentiment analysis, as the name suggests, assesses the overall mood of the market, so to speak. You can make a better decision by understanding what fellow traders are doing.
These three allow you to get a well-rounded, bird’s-eye view of the market.
Strategies for CFD Trading
There are various subcategories for strategies, but primarily, there are two for CFD trading: short-term and long-term.
- Short-Term (Day Trading and Scalping): A short-term strategy involves making frequent trades within short timeframes, focusing and capitalizing on small price movements.
- Long-Term (Position Trading, Buying, and Holding): While CFD trading is dominated by short-term strategies, there are situations where holding positions over an extended period and banking on sustained market trends is a profitable strategy.
There’s no better strategy here. The plan you pick should align with your goals, risk tolerance, trading style, and the time you can dedicate to market analysis.
4. Decide Whether to Buy or Sell
What makes CFD trading unique is that it offers traders the option to stay active no matter whether the market is falling or rising. Irrespective of which direction the price moves, it’s possible to make a potentially profitable trade.
Let’s assume we’re trading the stocks of a company whose stocks are listed at $50 per share. If the price rises to $60 from $50 and you predicted the same, you’ll gain a $10 profit per share. On the other hand, if you expected it to drop to $40, you’d sell at $50 and profit from the $10 decrease per share.
5. Set Up Your Trade and Manage Risk
After deciding whether to buy or sell, you can begin trading. Since we’ve already created an account on cTrader via XBTFX on Step 2, you should have received an email with your login details. It should look like this:
Go ahead and set a new password, and log in to your cTrader account. Once you’ve logged in, you’d be able to see the cTrader trading screen:
From here, you can select your position size, apply leverage and margin, and manage risk. Choosing your position size is a major decision, as it determines your profits and losses, as well as how much money or how many units of an asset (stocks, crypto, the lot) you want to trade in a single position.
A good rule of thumb here is to follow the 2% rule. All the professionals recommend beginners follow this rule, which suggests risking only a small percentage of your total trading capital on any one trade, which is usually 1-2%. Certainly, this limits your profits, but it also limits losses and it is a good rule to follow until you’re well-versed in CFD trading.
Talking about risk management tools, you can use the handy stop-loss feature, which automatically closes your trade if the price (predefined) moves too far against you, preventing excessive losses.
For example, if you buy at $100 and set a stop-loss at $95, your trade will automatically close if the price drops to $95. On the other hand, in a similar manner but for securing profits, there’s a feature called take-profit, which closes the trade when a certain amount of profit is gained, preventing you from greed-based trading.
Risk management tools are the backbone of CFD trading, as they keep your accounts from wiping out if the market swings unexpectedly and quickly, which is always a possibility.
6. Execute, Monitor, and Close Your Trade
You’ve chosen your market, you know your position size and strategy. The safety nets are in, and it's time to place the trade. Once the trade is placed, you must actively analyze the market. Prices can change fast, and if you're not paying attention, you might miss opportunities or let losses run too far.
Political events, economic reports, massive social changes, and breaking news can have a huge impact on the market. Keep an eye on financial news sources, or use our built-in alerts to help you react quickly when big moves happen. Another way to track the market is by using live price charts on platforms like MT4, MT5, and cTrader.
Lastly, always actively decide whether you want to cash out or let the trade run when you're in profit. The choice is yours: you can take profits at a set level (using a take-profit order) or manually wait for signs of a slowdown before exiting.
If a trade goes south, it's best to cut losses. A stop-loss order helps in this situation, allowing you to walk away without letting emotions dictate your next move.
Closing Thoughts
If traditional trading isn’t your style or you simply want to break away from its slow and restrictive nature, learning how to start CFD trading can be a great option. You can take advantage of its fast-paced market, the ability to trade in any market condition, and the potential of leverage. Remember to approach it strategically while keeping risks in mind, and you should be good to go.
FAQs
How to trade CFDs for beginners?
Step one would be to read up about CFDs and CFD trading and get yourself a reliable broker like XBTFX. Here, XBTFX fulfils both roles of being a broker and offering educational materials, access to professional strategies, as well as beginner-friendly features. Open a demo account to practice risk-free, and once you learn the concepts of buying long or selling short, risk management, and find which market suits you best, place your first trade using trading tools like cTrader. Lastly, stay updated on financial news.
How much money do you need to start CFD trading?
The amount varies from one broker to another. XBTFX allows you to start with as little as $10. However, having at least $100–$500 gives you more flexibility to manage risk and open multiple trades. Keep in mind that the x-factor of CFDs is that they use leverage, so you don’t need a large upfront investment, but proper risk management is essential as it works both ways.
Is CFD trading profitable?
Yes, it can be profitable, but that largely depends on your strategy, market knowledge, and risk management. Profits come from correctly predicting price movements, but losses can occur just as quickly.
Is CFD good for beginners?
CFD trading can be beginner-friendly if approached the right way. Functioning primarily in volatile markets, prices can swing fast here. Make use of demo accounts and educational resources to prepare yourself. Also, it is best to start small and not risk too much initially.
