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CFD Trading for Beginners (Complete Guide 2023)

CFD trading has become increasingly popular over the past 10 to 15 years. This is mostly due to the fact that they are simple to understand and provide traders with the opportunity to make large returns with a small deposit.

Table of Contents

What is CFD Trading?

CFD trading is a type of trading where a person enters into a contract with a CFD broker instead of buying the underlying asset directly.

CFD stands for Contract for Difference.

This is a very popular method for trading a variety of instruments like gold, oil, indices, cryptocurrencies, stocks, and other assets.

The main advantage of CFDs is that you are trading without ownership of the product you are trading.

For example, when you buy shares on the stock market, you own them. When you buy wheat or sugar on the commodity exchange, you need to take care of the availability of a warehouse and transportation.

But when you buy CFDs on shares or commodities, you do not get a physical asset and do not become the owner of the shares or commodities.

You buy and then sell a CFD contract for the difference in the price of an asset, while making a good profit. And the presence of leverage allows you to significantly increase this profit.

What are the Benefits of CFD Trading?

Benefits of CFD Trading

1. Leverage

Because CFDs let you use leverage, you can make big profits even with a small deposit. Note that the stock market is traded either without leverage or with a minimum leverage.

2. Flexibility

When trading CFDs, you can set stop loss and take profit levels in advance, which allows you to determine potential profits and limit losses.

3. Minimum investment

Investing in CFDs is profitable even if you start with a small amount.

4. Large selection of trading instruments

When trading CFDs, you can choose from stocks, indices, commodities, gold, oil, cryptocurrencies, etc.

5. Trade in both directions

Unlike trading in the stock market and the cryptocurrency exchange, you can open not only long positions (buy), but also short positions (sell).

6. Validity

CFDs do not have an expiration date (like options) so you can keep them open as long as you like.

How to Trade CFD Contracts?

How to Trade CFD Contracts

Investing in CFDs is different from traditional investing.

With CFDs, you can trade on the financial market with little investment.

Many CFD brokers offer high leverage, and this is both a plus and a minus.

The trader selects a CFD asset provided by the broker. It could be a currency, a share, an index, or any other asset that the broker has on their list.

The trader opens the position and sets parameters, such as leverage, the amount invested, whether it is a long or short position, and other parameters.

The two enter into a contract, agreeing on the opening price for the position and whether or not there will be any extra fees, such as overnight fees.

The position is opened and stays open until the trader decides to close it or until an automatic command closes it, like when a Stop Loss or Take Profit point is reached or when the contract expires.

The broker pays the trader if the position closes with a profit. If it closes at a loss, the broker charges the trader the difference.

CFD Trading Examples

Let’s take a look at how CFD contracts work using a specific example.

Example 01

Suppose an investor decides to enter into a CFD contract with a broker to buy 1 ounce of gold.

When buying 1 ounce of gold on the commodity exchange, an investor would have to pay 1,300 euros. To buy a CFD, an investor does not need to pay 1,300 euros. He must have a certain amount of funds to cover the margin in his account.

Let’s say the broker’s margin percentage is 15%. The investor must have 15% of 1300 euros = 195 euros in their account to open a trade.

If the price of gold rises by 195 euros to 1495 euros per ounce, then an investor who bought gold on the commodity exchange will make a profit of 195 euros. That is, he would earn 15% of his investment.

An investor who buys a CFD on gold will receive the difference in price per 1 ounce of gold between the opening of the contract and its closing. This will amount to 1495 – 1300 = 195 euros. Thus, this amounts to a profit of 100% of the investment.

Thus, you can place CFD trades in small amounts and get the same profit as on a commodity exchange. At the same time, you do not own the goods and cannot sell them on the exchange. But at any time, you can sell a CFD contract and make a profit, which is calculated as the difference between the buy price and the sell price.

Example 02

Let’s look at another example.

You decide to buy 100 shares of Facebook because you think Facebook’s price will go up.

The share price is $150. On the stock exchange, you have to pay $15,000 for a hundred shares.

With a 1:20 leverage CFD broker, you only need $750 to buy Facebook shares. This amount is calculated as follows.

First, we determine the margin – 100% / 20 = 5%. The CFD margin percentage depends on the level and volatility of the underlying stock.

For oil, for example, there is a different margin than Facebook margin. Next, we determine the amount needed to buy the shares: 15,000 × 5% = $750.

Let’s say the price of a Facebook share goes up $10 to $160 and you decide to close the deal. Thus, the estimated amount is $16,000 per block of shares.

Without taking into account commissions, your profit in this case will be 16,000 – 15,000 = 1000 dollars! You earned $1,000 by investing only $750, which means you made a 130% return on your investment.

CFD Trading Strategies

cfd trading strategies

Invest only the money that you can lose

In other words, don’t trade with your last money. Only in this case you will be able to soberly assess the situation and make the right decisions.

The recommended minimum deposit to start trading must be at least $500.

Start small

Open a position in the amount of 2.5% of your starting capital.

If your deposit is $500, then the risk per trade should not exceed $12.5. Of course, the profit will be small, but your losses are limited. Then, when you are confident in yourself and in your strategy, you can raise the risk to 15% of the deposit.

Remember that it is better to increase the size of the deposit, and not the percentage of risk, then you will start making good money and will not worry about the safety of your investments.

Always set a stop loss

This is an important condition for successful trading. A stop loss guarantees you that you will not lose more than the amount that you set in advance. This way you know how much money you can lose in one trade.

Control your emotions

While trading in the financial markets, many people experience emotions such as fear, greed, excitement, and others. They interfere with concentration, and under their influence people lose their capital in a very short time.

You need to learn to control your emotions. Imagine that you are not trading with your own money, but with someone else’s, and your career depends on it.

Set a daily goal and stop trading when you reach this goal

Every day, a small profit of $50 is better than if you open one big trade with a goal of $500 per day, and it goes into the red.

Do not deviate from your strategy and trading plan

Your trading should not be chaotic. All your actions should be logical and thoughtful. Before opening a trade, conduct a technical analysis, look at the calendar for what economic news is expected that day, use technical indicators and graphical tools, such as horizontal levels and trend lines.

Conclusion

I can say with full confidence that if you define a trading strategy in advance and set clear goals, you will quickly get a good income from investing in CFD contracts.

You will not notice how after some time you will be able to give up your full-time job and devote yourself exclusively to investing. You will have a lot of free time and money. You will be able to go on vacation more often, or finally buy the car of your dreams. But your goals must be realistic and match your abilities.

If you put $100 into your account, and in a month, you want to earn money for a new car, then nothing will come of it. Most likely, you will lose all your investments, as you will take a very big risk.

If you want to learn how to trade the stock market and have the time to follow economic news and analyze charts, then it is definitely worth starting CFD trading. Every day, a small trade that you close with a plus can mean big profits in the long run. And if you constantly strive for new knowledge, read books about trading and follow economic news, you will learn how to make the right forecasts and start earning consistently on CFD contracts.

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