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Despite the almost "new kid on the block" feeling surrounding CFDs, they have actually been around for over three decades now. An alternative to traditional trading, modern traders seem to gravitate towards it more and more with each passing day.
However, if you’re a complete beginner or someone who’s only ever traded using the traditional method of holding stocks, it might seem rather confusing at first. You may have heard about it being fast and flexible, but understanding the risks as well as the strategies for success is equally important.
By the end of this post, you’ll learn exactly how to use CFD trading and everything surrounding it, so strap in.
What is CFD Trading?
CFD trading falls under the same umbrella as traditional trading, which, assuming you’re somewhat aware of. On a very fundamental level, the two aren’t different. Now, with that said, they aren’t exactly the same either.
CFD trading works on the principle of speculation. You do not make a profit (or suffer a loss) when the price of an asset you own goes up, like in traditional trading. Instead, you’re trading on price movements. If you correctly predict the cost of something, like stocks, forex, or crypto, going up or down, you’re going to have a payday.
You put down a small percentage of the trade’s value (called margin), and if the price moves in your favor, you pocket the difference. If it moves against you, you owe the difference. For example, let’s say you think Tesla stock will rise. Instead of buying the actual shares, you open a CFD trade at $200. If the price jumps to $220, you earn the $20 difference. But if it drops to $180, you lose $20. That is the concept of CFD trading in a nutshell.
How CFD Trading Works
At its core, CFD trading is simply about speculating on the price movements of assets without owning them. Predict right and bank the profits. Predict incorrectly and bear the losses. Sounds rather similar to traditional trading in a sense, but here is what makes it different: ownership.
While there are more nuances that set them apart, the biggest difference is the concept of ownership, or a lack thereof. In traditional trading, you must own a stock in order to trade it. Without having Tesla stock in your possession, you cannot trade it. This limitation does not exist within CFDs. You don’t have to actually buy any asset, be it stocks or forex, since you’re merely betting on its price movement. From there, components like spreads, margins, and leverage come into play.
Leverage
Let’s talk about leverage first, as it is one of the biggest advantages of CFD trading. It allows you to control a much bigger trade without an equally large deposit.
For example, if you’re getting, say, a 10:1 leverage, it means a $1,000 deposit lets you trade $10,000 worth of assets. This greatly reduces the barrier to entry, which is a major problem with traditional trading, and amplifies potential gains. However, it can be a double-edged sword. While profits are boosted, the potential for loss is equally high.
Spreads and Margin
Spreads exist in traditional trading too. However, they are the major cost of trading in CFDs. A spread is the small price difference between buying and selling, which is paid automatically to your broker when opening a trade.
Margin, on the other hand, is unique to CFDs and is the fraction of the total trade value you put down, allowing you to control a much larger position using leverage. Remember the example above? Our $1,000 deposit is our margin, and with 10:1 leverage, it allows us to trade $10,000 worth of assets. Spreads and margins work hand in hand with leverage.
Key Markets for CFDs
CFDs, at least with a good platform, allow you to access multiple markets all from a single account. In traditional trading, you must create a separate account for each new market. Here are the markets CFD traders have access to:
- Stocks: Trade CFDs on shares like Apple, Amazon, or Tesla.
- Forex: Bet on currency pairs like EUR/USD or GBP/JPY.
- Commodities: Speculate on gold, oil, or natural gas.
- Indices: Trade on market indexes like the S&P 500 or FTSE 100.
- Crypto: Some brokers offer CFDs on Bitcoin, Ethereum, and other digital assets.
CFD trading gives you flexibility, but with great power comes greater risk.
How to Use CFD Trading: A Step-by-Step Guide
Trading CFDs is a time-sensitive ordeal, and holding isn’t particularly common. It’s fast-paced, high-risk, but high-reward. So, it’s best to have a clear understanding of all the concepts right from the jump.
Now, with that out of the way, here’s a guide on how to get started with trading CFDs:
1. Choose a CFD Broker
You’ll be required to create a CFD account with a reliable broker before you start trading. The importance of picking the right broker cannot be overstated. It’s a decision that can define how your trading journey will pan out. There are several platforms out there, so take your time and see which one offers the most benefits.
For context, a broker is a company that gives you access to the CFD market, holds your money, and helps you execute trades.
A bad broker overcharges you with hidden fees, delays withdrawals, manipulates prices, or has slow execution that causes you to lose money. Some brokers even have wider spreads (the difference between the buy and sell price), making it harder to profit.
A good broker should provide you with tight spreads, low fees, and access to multiple platforms. Our platform, XBTFX, does just that and more. It’s a solid option that makes trading easy, transparent, and reliable.
We offer:
- Tight spreads and low fees
- High leverage, up to a massive 500:1
- Access to multiple markets like stocks, forex trading, crypto, indices, and commodities
- Fast order executions with no delays
- Secure and regulated, ensuring your trades and funds are safe
- Access to expert trader strategies
Choose a broker like XBTFX that works for you, not against you. With the right platform, strategy, and risk management, you’ll be in a stronger position to take advantage of market opportunities and grow your portfolio over time.
Also, be sure to learn the difference between CFD broker vs Crypto exchange.
2. Open a CFD Trading Account
The next step after choosing a CFD broker is to sign up and open your account. It’s advisable to start with a demo account to practice risk-free using virtual funds. However, you can also go straight to a live account to start trading with real capital.
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 and click on Create New Account.
Next, you’ll have the option to create a Live or a Demo account. Again, if this is your first time trading, we recommend starting with a demo account.
After clicking on the Demo tab, click on Product, and select the only option from the dropdown menu. All the other fields should be entered automatically, so go ahead and finish the form-filling process.
3. Pick a Market to Trade
CFD traders vary quite a bit because of the many market options available within the CFD trading fold. You can decide what you want to trade, be it stocks, forex, commodities, indices, or crypto. Needless to say, each market moves differently and suits different trading styles and goals.
4. Decide Whether to Buy or Sell
One of the major differences between traditional and CFD trading is the fact that you can gain profits no matter if market prices are going up or down. If you think the prices will go up, you buy and go long. Similarly, if you think they’ll drop, you sell and go short.
Here’s a list of the main factors that influence CFD prices:
- Supply and Demand
- Economic News & Reports
- Company Earnings (for stocks)
- Market Sentiment & Investor Behavior
- Central Bank Policies
- Political Events & Global Crises
- Inflation & Currency Value (especially relevant for forex)
- Natural Disasters & Weather (for commodities)
- Speculation & Hype (especially affects crypto)
In the real world, it works something like this. If you believe Apple stock will rise, you buy a CFD on Apple. If it goes from $150 to $160, you make a profit on the $10 difference. But if you think Apple is overpriced and will fall, you sell a CFD instead. If it drops from $150 to $140, you still make money.
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:
You’ll be required to set a new password, so go ahead and do that before logging 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 trade size, apply leverage and margin, and manage risk. Also, the position size you pick matters because it determines how much money you’re putting at risk.
To manage your exposure, understand lot sizes, which are the number of assets per trade, along with margin requirements, and the money you must put down. Since CFDs use leverage, you only need to put down the margin, not the full amount of an asset. Bigger positions mean bigger potential profits, but also bigger risks, so tread lightly. Leverage works both ways.
Moreover, before placing a trade, always make sure you’ve set up a stop-loss and take-profit order. Stop-loss orders automatically close a trade at a set level to limit your losses, while take-profits lock in the gains when the price reaches your set target. These are your safety nets and are crucial because CFD markets move fast, and you won’t always be watching your screen.
6. Execute and Monitor Your Trade
Once your trade is live, it’s time to stay active and keep an eye out for several areas:
- Watch price movements using charts
- Stay updated with market news, as that can massively affect your trade
- Adjust your stop-loss or take-profit as and when needed
- Watch out for trends and adjust your strategy if required
XBTFX makes it easy by letting you set price alerts so you know when big moves happen. If things aren’t going your way, you might choose to exit early to cut losses before they get worse.
Closing Thoughts
To wrap it all up, it isn’t surprising to see the surge in CFD traders. It breaks free from the chains of traditional trading and gives modern traders the opportunity to bank profits no matter if the market is bearish or bullish.
With that said, it isn’t as simple as just clicking "buy" or "sell." You must understand how to use CFD trading and its core concepts like leverage, spreads, and margins.
Remember, it’s easy to win big and lose big simultaneously. Even your choice of broker makes a huge difference. A good broker makes trading secure and offers fast execution, while a bad one will leave you with hidden fees and slow withdrawals.
In a nutshell, the key to success in CFD trading when you’re just getting your feet wet is starting small, managing risk, and having a solid plan.
FAQs
Is CFD trading good for beginners?
CFD trading must be approached with caution. Trading of any kind is risky. The concept of leverage certainly lowers the barrier to entry, but while it can lead to big wins, big losses are possible as well. Beginners might struggle with the fast-paced nature of the market, so it's best to approach it with caution.
How do you trade with CFDs?
With CFDs, trading happens by speculating on the price movement of an asset, such as stocks, forex, or commodities. No ownership is involved, as you do not own the asset. It's purely speculation on price movements. You choose to go long (buy) if you think the price will rise or short (sell) if you expect it to fall. These trades are leveraged, meaning you only put down a small deposit (margin).
Is CFD trading profitable?
Absolutely, which is why modern traders use it. However, the saying “with great power comes great responsibility” applies here. It isn’t uncommon for traders to incur losses due to leverage or market volatility. Profitability depends on skills, experience, and a solid strategy with a safety net in place.
Is it illegal to trade CFDs?
CFD trading is illegal in the US because regulators like the SEC and CFTC consider it too risky for retail investors. However, it is legal in many other places, including the UK, Australia, and most of Europe, where it is regulated.
