Trading Guides

How To Trade CFDs

May 30, 2023

Trading CFDs is a way to buy or sell units in shares, commodities, indices, currency pairs and more. They allow traders to take a variety of positions, gain exposure to a range of markets and trade on price movements without taking ownership of the underlying asset. Because of this, you may want to learn how to trade CFDs for yourself.  

CFDs can undergo rapid changes, which require careful monitoring and a good foundational knowledge in order to make the right strategic trades. 

In this article, we’ll explain how to trade CFDs, what skills you need to develop to make successful trades and how to manage risk with the right management tools, insights and market analysis. 

How to trade CFDs

Learning how to trade a contract for difference can be more complex than other financial instruments because it is a speculative product that uses leverage.  

Leveraged trades require you to have a good understanding of how CFDs work, what strategy you want to implement and a powerful trading platform to help you navigate the live trading environment. 

In our six-step guide to trading CFDs, we’ll cover all these bases, from creating your account to choosing a position to open.

1. Understand what CFD trading is

CFD trading refers to the buying and selling contracts for difference; these units are financial instruments that give you exposure to various markets without the need to take ownership of the underlying asset or index. Instead, traders speculate on the movement of that asset, predicting whether the spot price will rise or fall within a given time frame. 

If you don’t want to trade a leveraged financial instrument, another option is share dealing, which, unlike CFD trading, requires traders to put down the full value of the asset in order to make a trade.   

Trading a CFD, by comparison, only requires a margin of the full value to be put down in order to make a trade. This means that if you correctly predict the market’s movement, your profits will be magnified in comparison to the capital you put in as a deposit. However, if the market moves against your prediction, your losses will also be amplified and can exceed your initial outlay amount. 

You can learn more about how CFD trading works, including examples of CFD trading, in our in-depth guide. 

2. Create and fund a CFD trading account

It doesn’t take long to set up a CFD trading account and begin to speculate in live markets. However, before you start speculating, you may want to practise with a demo account first. At VT Markets, we offer clients a 90-day, obligation-free trial period so you can learn to apply trading strategies in a risk-free trading environment. 

Then, once you’re ready to open a live account, you just need to fill in a few details and then start funding your account. At this time, you’ll also want to download a platform to your PC or mobile device so you can monitor your trade positions. VT Markets uses the power of MetaTrader 4 and next-generation MetaTrader 5, which gives our clients a convenient and flexible way to make trades on a schedule that suits them.

3. Choose your market and timeframe

There are a number of different markets you can choose to trade CFDs in. 

Just some of these include: 

  • ForexForex, or foreign exchanges, are the markets by which you can trade all the major, minor and exotic currency pairs via CFDs. You can also learn more about Forex markets and trading with our detailed guide.
  • Indices Indices are baskets of shares from major companies on various stock exchanges around the world. With CFDs, you can choose to speculate on the movement of an index like the S&P 500, the ASX 200, the Dow Jones or the Nasdaq.
  • EnergiesAmongst the markets that make up hard commodities, energies are some of the most valuable and potentially volatile, offering extra opportunities for experienced traders. Energies CFDs include crude oil, natural gas, solar and wind power. 
  • Precious metals — You may also choose to trade CFDs in other hard commodity markets, those of precious metals. This includes gold, silver and copper.
  • Soft commodities Soft commodities are defined as raw natural materials which must be cultivated by human effort to produce a yield. They include many highly liquid markets like soy, lumber, wheat, livestock, coffee, cocoa, hogs, sugar and rice.
     
  • Other markets — CFD trading is also possible in a number of other markets, for example, bonds, exchange-traded funds (ETF) and options. 

As well as these markets, CFD trading can take the form of trading on spot prices, which is a popular option for short-term trading, and on futures, which suit medium and longer-term positions.  

4. Decide whether to go long or short

In trading, a long position refers to buying with the expectation that prices will rise and going short to selling when you expect the market price to fall. CFDs offer traders the opportunity to go both long or short on a trade, depending on what your market prediction is. 

The amount you put down to open a position on a CFD trade is called a margin, and it is a percentage of the total asset value. So, for example, if you want to gain exposure to £1,000 worth of a company’s CFD units — and the margin rate was 20% — you will pay a margin of £200. Remember, although your outlay is £200, your profit or loss will be calculated on the full value of your position — in this example, £1,000. 

Then, you’ll wait to see how the market moves. The spread — the difference between the buying and selling price of your trade, will define the magnitude of your profit or loss. 

Brokers will also charge a commission each time to take a position; that is, open or close a trade on the market. When assessing your performance in a trade, you’ll need to take these commission fees into account, as well as the performance of the asset’s full value.   

Beyond taking a short, medium or long-term position, there are various more detailed CFD trading strategies you can pursue, especially as you become a more experienced trader. VT Markets offers in-depth guides for these strategies, so you can refine a more sophisticated approach to trading CFDs in live markets.   

5. Set your stops and limits

An essential part of a good CFD trading strategy is making use of the appropriate risk management strategies in order to make sure you don’t lose more money than you can afford if a trade doesn’t go your way. 

One of these tools is a stop-loss order. This is an automatic order you as a trader set up, which ensures your position will automatically close if it drops below a certain threshold you’ve set up. 

A limit order can be used for situations where the market has moved to a more favourable position for you. It automatically closes your position at this more favourable level so you can cash out on your advantageous position.  

6. Monitor your CFD trade and close your position

With your strategy in place, it’s time to monitor your open position in real-time and close it at a point when you’re happy with the performance or when you want to mitigate any further losses. 

VT Markets offers a range of trading tools, real-time updates, market signals, investor insights and daily market analysis in order to help you decide when the best time to close out your position will be. Our lightning-fast trading platforms quickly execute orders, so you can make your move exactly when you mean to. 

VT Markets — your online trading broker partners

AT VT Markets, we aim to give our clients the most transparent, fast and reliable live trading environment to make trading on whatever market you choose easy. We offer access to over a thousand instruments across all asset classes, from CFDs to commodities trading and more. Our superior trading platforms, expert analysis and insightful tools give you the resources you need to develop your knowledge and skill as a trader.  

Looking for more advice or need a hand setting up your live trading account? Our customer service can help. Contact us today and take advantage of our client services.   

FAQs

How does a contract for different CFDs work?

If you’ve been wondering how to trade a contract for difference, the complexity of this financial derivative product may have confused you. In order to understand and use CFDs to diversify your portfolio, there are a few essentials about how they work you’ll need to know. 

  • CFDs allow traders to speculate on whether the price of an underlying asset or index will rise or fall. You can profit from price movements in both directions if you correctly predict what the market will do. 
  • CFDs are traded using leverage, which means sales are made by putting down a marginal deposit rather than the full value of the asset. This makes them more affordable than other trades. 
  • Profits and losses from CFDs are always calculated based on the entire value of the trade, not from the marginal deposit.
  • You can trade many asset classes with CFDs, and you can trade out of hours too. 

How do I start trading CFDs?

To start trading CFDs, you’ll need to create a live trading account, deposit your initial funds and use a powerful trading platform in order to monitor the price movements of your underlying asset. 

CFDs mimic the movement of their assets and rise and fall with them. You can choose from thousands of live markets and different asset classes. Once you’ve chosen which market is right for you, you can decide on a CFD trading strategy, like swing trading or day trading. 

After you have your chosen market and trading strategy, you can open your first position, monitor your trade and choose to close your position when it’s most beneficial to you.

Is it better to invest or trade CFDs?

Both investing and trading CFDs can offer unique opportunities for experienced traders to make a profit. At VT Markets, we offer traders a wide range of options so they can build up a diverse and risk-averse portfolio that suits them.

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