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How to trade CFDs
Interested in CFD trading? Follow this step-by-step guide and get started today. Learn what contracts for difference (CFDs) are, how to trade them, and more.
- How to place a CFD trade
- CFD trading steps
- CFD trading explained
- Opening an account
- Choosing a CFD market
- Decide to buy contracts (go long) or sell (go short)
- Select how many CFDs to trade
- Add stop and limit orders
- Monitor your CFD trade
- Closing your trade
- CFD example
- FAQs
How to place a CFD trade
To place a CFD trade, you first need to understand how contracts for difference work. Then, you can choose whether to go long or short and open your position by selecting your chosen number of contracts. You’ll realize any profits or losses when you close the position.
CFDs are sophisticated tools, enabling you to speculate on both rising or falling markets, use leverage and access hundreds of instruments – 24 hours a day. But to take full advantage of the versatility of CFDs, you’ll want to get started right.
Follow these seven steps to open your first CFD position today.
CFD trading steps
- Learn how CFDs work
Understand the basics behind contracts for difference, and how they differ to other financial products - Open an account
Get started with a demo, or go straight to live markets - Choose a CFD market
Decide which market you want to trade. Looking for inspiration? Head over to our research portal - Decide to buy or sell
Click 'buy' if you think your market will increase in value, or 'sell' if you think it will fall - Select your trade size
Choose how many CFDs to buy or sell - Add a stop loss
A stop loss is an order to close your position out at a certain price if it moves too far against you, and a useful way of limiting your risk - Execute your trade
Hit ‘place trade’ to open your position - Monitor and close your trade
Now your position is open, you will see your profit/loss update in real time. You can exit it by clicking the close trade button
Let’s take a closer look at each step.
1. How CFDs Work
CFD trading is the buying and selling of contracts for difference, financial derivatives in which you agree to exchange the difference between the opening and closing price of a specific financial asset – such as a stock, index or commodity.
Unlike traditional investing, you don’t take delivery of the asset. You never own the stock you’re trading.
For example, say that you wanted to go long on the DAX. Instead of investing in a DAX ETF, you can buy a DAX CFD. In doing so, you’re committing to exchange the difference in the DAX’s price from when you open your position to when you close it.
If the DAX rises 100 points, you earn €100 as profit. If it falls 100 points, you lose €100.
2. Opening an account
To buy and sell CFDs, you’ll need an account. This is what you’ll use to research new opportunities, open and close positions, manage your risk, monitor your P/L and more.
Before you commit real capital, you can open a demo trading account to try things out with zero risk. A FOREX.com demo gives you $50,000 virtual funds to buy and sell our full range of markets. All the price movements are real, the only part that isn’t is the money involved. So it’s a great place to practice.
When you’re ready to risk some real capital, you can open a live account, which usually takes minutes. Then, once you’ve added some funds, you’ll be all set to get started.
3. Choosing a CFD market
One major advantage of CFDs is the huge range of markets you can choose from.
At FOREX.com, we offer contracts on hundreds of individual markets across stocks, indices, and commodities. From a single platform, you can access major markets around the globe.
With so much choice, it’s important to find an opportunity that suits you. There are lots of research tools available on our platform to help you do just that – including news and analysis pieces, technical indicators, alerts and more.
Learn more about our trading tools.
Once you’ve chosen a market, use the search function on the platform or app to find it. You’ll be able to see its live price, view a chart and take a look at all the information you need to know before taking your position.
4. Decide to buy contracts (go long) or sell (go short)
CFD markets have two prices. The first is the sell price (the bid), and the second price is the buy price (the ask). The difference between the two is known as the spread.
Both are based on the price of the underlying instrument. The sell price is always typically slightly lower than the market price, while the buy is slightly higher. Before you open your position, you’ll need to decide whether you want to buy or sell.
If you believe your market will go up, you go long by trading at the buy price. If you believe it will fall, you can short it by trading at the sell price.
Shorting a market means you earn a profit if it falls in value, and a loss if it rises. Find out more about shorting.
5. Select how many CFDs to trade
You’ve chosen your market and decided whether to go long or short. But how do you select the size of your position? With CFD trading, you select the number of contracts to buy or sell.
Each contract represents a certain amount of its underlying asset. For example, with stocks, one CFD is equivalent to one share. To see what a contract means for your market, look up the 'tick value' in the instrument's market information sheets.
CFDs are bought and sold in the base currency of the underlying market. So, if you’re trading a US stock, then your profit or loss will be calculated in US dollars.
How much margin?
Contracts for difference utilize leverage, which means you only need to have a small percentage of the overall trade value, known as margin, in your account to open a position. Generally speaking, the larger the value of your trade, the more margin required.
It is important that you have enough funds in your account to cover your margin. The margin calculator in the trading platform will automatically calculate how much you’ll need to open a position.
6. Add stop and limit orders
Before you place your trade, you’ll want to consider your risk management strategy.
A key risk management technique is to place an order, such as a stop loss, that will automatically close the trade if the market reaches a certain level.
A stop-loss order is an instruction that tells your broker to close your position once it reaches a specific level set by you. This will, as the name suggests, be at a worse price than the current market level and can typically be triggered on losing positions to help minimize losses.
A limit order, meanwhile, is an instruction to close out a trade at a price that is better than the current market level and is typically used to help lock in profits.
Stop losses and limit orders are free to use and can be placed in the dealing ticket when you first place your trade, or once it is open.
Once you’ve set up your risk management, you can execute by hitting ‘Place Trade’.
7. Monitor your CFD trade
Now your position is live, your profit or loss will move as the underlying market goes up and down.
You can track market prices; see your profit/loss update in real time and edit, add to or exit your position from your computer, or by using our mobile app.
If you didn’t select a stop or limit before opening the position, then it isn’t too late – you can add them now. If you already have exit orders in place, meanwhile, you can move them to reflect changing conditions.
8. Closing your trade
To close a CFD, you need to trade in the opposite direction to when you opened it. If you bought 500 CFDs at the outset, then you sell 500 CFDs now. If you sold 30 contracts to open, you buy 30 contracts to close.
To do that, you can select the 'close position' option within the positions window.
Your net open profit or loss will now be realized and immediately reflected in your account cash balance.
To calculate your profit or loss manually, just subtract the opening price from the closing price (or the opposite for short positions), then multiply that figure by the size of your position. Just remember to take any costs into account.
CFD example
- You open a new FOREX.com account and deposit $2000
- After doing some research, you decide to trade the S&P 500
- You believe that the index will fall, so you plan to sell the market at 4140
- You sell two US 500 CFDs, which means you earn $2 for each point of downward movement, and lose $2 for every upward point
- You set a stop at 4150, which will close your position if it hits a loss of $20
- The S&P falls and you close at 4100. 4140-4100 is 40 points, so you make $80
However, if the S&P 500 had risen instead, you would have made a loss. For more in-depth examples of how CFD trading works, take a look at our CFD examples page.
FAQs
What’s the best CFD trading platform?
Every trader has their own opinion on which platform is best – it all depends on what your specific requirements are. It’s often a good idea to try out a few different options to see what works for you.
At FOREX.com, you can access our web trading platform, apps for Android and iPhone and MetaTrader 4 or 5.
What’s the difference between CFDs and investing?
Contracts for difference and investing both enable you to take positions on financial markets, but they work in different ways. When you invest, you are typically buying and holding a market in the hope that it rises in value so you can sell it for profit. With CFDs, you never own the asset – you’re just speculating on its price movements.
CFDs bring several benefits over investing. You can trade on margin, short markets and more.
