How to Start CFD Trading: 6 Basic Steps for Beginners

Starting CFD trading involves more than opening an account and placing an order. A sound understanding of trade volume, position size, order types, and risk-management tools such as stop-loss orders provides the foundation for understanding how CFD positions are opened, managed and closed.

This article outlines how to start CFD trading in six basic steps, covering the process from selecting a market and preparing your trading platform to determining position size, placing an order, managing risk, and closing a position. It also highlights the key concepts and practical considerations to understand before entering a CFD trade.

What to Know Before Starting CFD Trading

CFD stands for Contract for Difference. A CFD is a derivative that provides exposure to changes in the price of an underlying asset without requiring you to purchase or own the asset itself.

Depending on the provider and applicable jurisdiction, CFD trading can provide access to markets including foreign exchange, shares, stock indices, commodities, and other instruments. Each market has its own characteristics, trading conditions, and factors that can influence price movements.

CFD trading differs from investing directly in an underlying asset because it does not involve ownership of that asset. For example, buying shares in a company gives you an ownership interest in the company, whereas a share CFD provides exposure to changes in the referenced share price without transferring ownership of the underlying shares.

Another distinct feature of CFD trading is the use of margin. Margin is the amount of funds required to open and maintain a position. Because CFDs are leveraged products, the total market exposure can be greater than the margin posted.

Leverage refers to using a relatively smaller amount of capital to gain exposure to a larger market position. It can amplify both profits and losses, meaning that relatively small movements in the underlying market can have a significant effect on the value of a CFD position relative to the margin supporting it.

The specific margin requirements, leverage limits, product availability, and retail-client protections that apply to CFD trading depend on the provider, instrument, account type and jurisdiction.

How CFDs Work: Understanding Profits and Losses

CFD profit or loss is determined by the difference between the opening and closing prices, multiplied by the position size, with applicable trading costs considered.

A long position gains value when the referenced price rises and loses value when it falls. For example, if a position is opened at $100 and closed at $105, the $5 price movement is favourable to the position before trading costs. If it is instead closed at $95, the same $5 movement is unfavourable.

A short position works in the opposite direction. A short position gains value when the referenced price falls and loses value when it rises.

Trading costs can include the spread, which is the difference between the bid and ask prices. Also, depending on the instrument and provider, other charges may also apply, including commissions or overnight financing costs.

Leverage is an important consideration because CFD profit or loss is linked to the position’s market exposure rather than simply the margin posted. As a result, leverage can amplify both gains and losses relative to the capital used as margin.

How to Start CFD Trading: 6 Basic Steps

Choose a Market and Instrument to Trade

The first step is to identify the market and specific CFD instrument you want to trade. Depending on the provider and applicable jurisdiction, available instruments may include FX pairs, individual shares, stock indices, commodities, metals, energies, and other markets.

Each market has its own characteristics and trading conditions. Before selecting an instrument, consider factors such as trading hours, volatility, liquidity, contract specifications, margin requirements, and the factors that can influence its price movements.

Prepare Your Trading Platform

Once you have identified a market and instrument, the next step is to prepare the trading platform you will use to monitor prices, analyse charts, place orders, and manage open positions.

Before placing a live order, familiarise yourself with the platform’s main functions, including bid and ask prices, available margin, account equity, open positions, pending orders, and unrealised profit or loss. It is also important to understand where and how different order types and risk-management tools can be applied.

Where available, a demo account can provide an opportunity to become familiar with the platform’s functions without placing a live CFD order. This can include practising the placement of orders and setting stop-loss or take-profit levels in a simulated environment.

Determine Your Position Size and Trading Volume

Position size refers to the amount of market exposure represented by a trade. Depending on the instrument, trading volume may be expressed in lots, units, or contracts.

Position size and margin are not the same. Margin is the amount of funds required to support a position, while position size represents the market exposure of the trade. Because CFDs are leveraged products, the market exposure can be greater than the margin posted.

Before opening a position, consider how its size relates to potential price movements and their monetary effect on the account. The distance between the entry price and a potential stop-loss level, together with the monetary value of each price movement, can help illustrate this relationship.

Choose an Order Type and Open a Position

Once the position size has been determined, the next step is to select an order type and open the CFD position.

A market order is intended to execute at the best available market price when the order is processed. A limit order specifies the price at which an order can be executed, while a stop order becomes active once its specified trigger level is reached.

Before submitting an order, check the trade direction, volume, order type, price conditions, and any attached stop-loss or take-profit instructions. In fast-moving markets, the execution price may differ from the price displayed when the order is placed, so understanding how each order type works is an important part of learning how to trade CFDs.

Set Up Risk Management, Including Stop-Loss Orders

Once a position is open, risk-management measures can be used to monitor and control potential financial exposure. These can include monitoring margin and position size, as well as using orders such as stop-losses to define a potential exit level if the market moves against the position.

A stop-loss order helps close a position when the market reaches a specified level that moves against the position. However, a stop-loss should not be treated as a guarantee of a particular execution price. During periods of rapid price movement or market gaps, a position may be closed at a different price from the specified stop level.

A take-profit order can also be used to close a position when a specified price level is reached. Both stop-loss and take-profit orders are subject to the execution conditions that apply to the relevant instrument and trading platform.

Close Your Position

The final step is to close the CFD position. A long position is closed by selling the corresponding position, while a short position is closed by buying it back.

A position can be closed manually through the trading platform or automatically when a relevant order condition is met, such as a stop-loss or take-profit level.

Once the position is closed, the difference between the opening and closing prices determines the realised profit or loss, after applicable trading costs.

Reviewing the completed trade can also help clarify how the instrument moved, how the order was executed, and how the position size and risk-management settings affected the outcome. This can provide a clearer understanding of the trading process and the factors that influenced the result.

Key Factors to Consider Before Starting CFD Trading

Understanding the mechanics of CFD trading is important because several factors can affect a position, including leverage, position size, trading costs, and market conditions.

• Understand leverage and margin. Leverage can amplify both gains and losses, while margin requirements determine the funds needed to support a position.

• Consider position size and costs. Position size affects the monetary impact of price movements, while spreads, commissions, financing charges, and other applicable costs can affect the overall result.

• Know your order types. Market, limit, and stop orders have different execution characteristics, particularly during fast-moving markets.

• Understand risk-management tools. Stop-loss orders can help manage potential exposure but do not guarantee execution at the specified price.

• Check the applicable trading conditions. Product availability, leverage limits, margin requirements, close-out rules, and client protections can vary by instrument, provider, and jurisdiction.

Understanding these factors can provide a clearer picture of what a CFD position involves before entering a trade.

Frequently Asked Questions

How much money do I need to start CFD trading?

The funds needed to start CFD trading depend on factors such as the provider, account type, instrument, minimum trade size, margin requirements, leverage, and applicable jurisdiction.

The minimum funds required to open a position are not the same as the funds needed to maintain sufficient available margin. Before opening an account or position, review the applicable minimum deposit, minimum trade volume, margin requirements, and other account conditions.

Which instruments are suitable for CFD beginners?

There is no single CFD instrument suitable for every beginner. Each market has different characteristics, including volatility, liquidity, trading hours, costs, and factors that influence price movements.

When reviewing an instrument, consider its underlying market, product specifications, margin requirements, trading hours, and available order types. The relevant considerations will depend on the instrument and the conditions applicable to the account.

How do I set a stop-loss when trading CFDs?

A stop-loss is set at a predefined price level where a position is intended to close if the market moves against it. The level can be considered in relation to factors such as market volatility, position size, and the potential monetary impact of the price movement.

A stop-loss does not guarantee a specific execution price. In rapidly moving or gapping markets, a position may be closed at a different price from the specified stop level.

How do I determine my CFD position size?

Position size represents the market exposure of a CFD trade. Its calculation depends on the instrument’s contract specifications, including contract size, price movement value, and the currency in which the instrument is denominated.

Position size can be assessed in relation to the potential loss associated with a given price movement or stop-loss distance. The exact calculation varies between instruments, so the provider’s contract specifications and applicable margin requirements should be reviewed before determining the trading volume.

Conclusion

Understanding how CFDs work is an important starting point for anyone researching how to start CFD trading. This includes understanding the differences between CFDs and direct ownership of an underlying asset, as well as the process of selecting an instrument, preparing a trading platform, determining position size, placing an order, managing risk, and closing a position.

The appropriate instrument, position size, and trading conditions can vary according to individual circumstances, the account, and the applicable jurisdiction. Reviewing the relevant product specifications, costs, margin requirements, and risk disclosures can provide important context before making any trading decisions.

CFD trading involves a high level of risk and may result in the loss of invested capital. This content is provided for informational purposes only and does not constitute investment advice.

For those who wish to familiarise themselves with a trading platform in a simulated environment, FXGT offers demo accounts with virtual funds. A demo account allows users to explore the trading environment and platform functionality without placing live CFD trades.