CFD Trading: A Complete Guide to Contracts For Difference
Contracts For Difference, or CFDs, are a type of financial derivative product which allow traders to speculate on the price of an asset. CFD trading has low barriers for entry in terms of cost and are available to trade anywhere online. However, they can be a complicated instrument, which means that many aspiring traders are not sure how to get started when they want to learn how to trade CFDs.
Never fear! In this article, we will explain in depth what CFDs are, how they work, the benefits and risks of CFD trading, how you can start trading CFDs and much more!
Table of Contents
- What Are Contracts For Difference?
- CFD Trading Explained - How to Trade CFDs
- What Are the Benefits of CFDs?
- What Are the Risks Associated With CFDs?
- Who Can Trade CFDs?
- How to Start Trading
- Finding Your Trading Style
- Manual vs. Automated trading
- Calculating Profits and Losses
- Seven Trading Tips For Beginners
What Are Contracts For Difference?
What is a CFD? A Contract For Difference, or CFD, is a contract between two parties to exchange the difference in the value of an asset, taken from the time the contract is opened, to the time the contract is closed.
To better understand CFDs, a good place to start is by looking at traditional investing. If you wanted to invest in a particular company, you could buy some shares in that company. Similarly, if you wanted to invest in gold or oil, you could buy a bar of gold or a barrel of oil. Then you would wait for the price of your shares of gold or oil to hopefully increase, enabling you to sell the asset at a higher price and thus make a profit.
CFD trading works similarly - you open a trade on an asset at a certain price, wait for the price to increase or decrease, and then make a profit (or a loss) on the difference.
One of the biggest differences between trading CFDs and traditional investing is that you do not take ownership of the asset. Instead, a CFD reflects the price of the underlying asset, and rather than buying that asset, you can speculate on how its price might change. This should give you a sufficient answer to the question, "What is a CFD?".
CFD Trading Explained - How to Trade CFDs
CFD trading allows you to attempt to profit from a market moving up or down. To get started, you will need:
- To open a trading account with a CFD broker
- To download that broker's trading platform
- To choose an asset you would like to trade
- To decide whether you think that the asset's price will go up or down.
Let's say that the price of gold was $1,500 an ounce, and you thought it might increase. In that case, you could open a 'buy' trade in your trading platform - this is known as a 'long' trade, and it means that you will open the trade at one price, expecting that the price will rise.
Should the price rise, as expected, you would then close the trade (or 'sell') at a higher price, making a profit on the difference between the two prices.
So, if you opened the trade when gold was priced at $1,500, and then closed the trade when gold hit $1,525, you would make a profit of $25 (note that this is a simple example, later we will get into a more detailed overview of how to calculate trading profits and losses).
On the other hand, if you thought the price of gold was going to fall, you could open a 'sell' trade in your trading platform. This is known as a 'short' trade, and it means you open a trade expecting the price of an asset to fall, and then close the trade (or 'buy' the asset back) and make a profit on the difference.
So, if you opened a short CFD trade when gold was priced at $1,500, and then closed the trade at $1,450, you would make a profit of $50. CFDs follow the price of the market, so how successful (or unsuccessful) your trade is, depends on the market's performance.
Is CFD Trading Legal?
Have you ever read online about the legality of CFD trading? Bits of information floating around out there about the legality of CFD trading have some traders asking, "Is CFD trading legal?"
It's worth noting here that the legality of CFDs depends on a trader's location around the world. The USA is one of the main examples of a country in which licensed brokers are not permitted to offer CFD trading.
The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have prohibited USA citizens and residents from opening CFD accounts on both domestic and foreign platforms.
The good news is that CFD trading is legal in many other parts of the world. If you want to know how to trade CFDs in the UK and elsewhere, you are in the right place!
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What Are the Benefits of CFDs?
Whilst there are plenty of CFD brokers who would be eager to provide you with a long list of benefits, sometimes it can be hard to know what to believe - is everything that they are saying true or is it just a sales pitch? Here, you can keep reading for a balanced overview of the benefits of trading CFDs followed by some of the risks involved.
One of the biggest benefits of trading CFDs or making CFD investments is the use of leverage. Leverage allows you to access a larger portion of the market with a smaller deposit than you would be able to via traditional investing
The amount of leverage you will have access to depends on the instrument you are trading, your local regulator and your broker. For professional traders, you may be able to obtain leverage of up to 1:500. For retail traders, some instruments will allow leverage of up to 1:30.
So, if you have $1,000 on your account and available leverage of 1:30, you can access $30 for every $1 on your account, or make trades that are valued up to $30,000. If we go back to the example of investing in gold, if you wanted to buy an ounce of gold valued at $1,500, you would need to spend $1,500. With Contracts for Difference, on the other hand, you can open a trade of that value with a fraction of that amount in your account.
If you are trading with a CFD broker that allows leverage of 1:20, this means that for every $1 you have on your account, you can trade $20 worth of gold. So if you wanted to open a trade on the equivalent of one ounce of gold, valued at $1,500, you would need a margin of $300 on your account.
This means that, with a relatively small deposit, you can still make the same profits (and losses) you would make in traditional investing. The difference is that the return on your initial investment is much higher. The risk is that potential losses are magnified to the same extent as potential profits.
|Gold CFD trade||Traditional investment|
|Long gold trade opens at $1,500, closes to $1,525||You make $25, or 8.33%||You make $25, or 1.67%|
|Long gold trade opens at $1,500, closes to $1,450||You lose $50, or 16.67%||You lose $50, or 3.33%|
You can see how different levels of CFD leverage works in the infographic below.
Trade Long and Short
One of the downsides of traditional investing is that you only make a profit when the markets are going up. If there is a market crash or one of your assets has a downturn, it could harm your investments as a whole.
CFD investments, on the other hand, allow you to trade both long and short, meaning you can profit in both rising and falling markets.
In a long CFD trade, the trader thinks that the value of an asset will increase. So they open a 'buy' trade at a lower price and then sell (or close the trade) at a higher price for a profit. If the market turns and the price decreases, however, the result will be a loss.
Source: DJI30-ECN, DailyChart - MT5 Admiral Markets. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
In a short CFD trade, the trader thinks an asset's price will decrease. Therefore, the trader opens a 'sell' trade, and will close it at a lower price, making a profit on the difference. Like in a long trade, if the asset's price moves in the opposite direction to what you expected, the trade would end in a loss.
Source: EURNZD, Daily Chart, MT5 Admiral Markets. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
With the ability to trade both long and short, CFD investments allow traders to find opportunities in any market.
Wide Range of Tradable Markets
Because CFD investments are derivatives of other assets, they can be created to represent virtually any market. In fact, many brokers (like Admiral Markets) give traders access to thousands of financial markets through a single trading platform.
Just some of the markets available for trading as CFDs include Forex currency pairs, shares, commodities, cryptocurrencies, Exchange-Traded Funds (ETFs), stock indices, bonds and more.
CFD investments on Forex allow you to trade on various currency pairs. These include Forex majors, like the EUR/USD, GBP/USD and USD/JPY; Forex minors like the EUR/GBP and AUD/NZD; and exotic pairs like the USD/CZK.
The currency market is highly speculative and highly volatile, which creates many opportunities for savvy traders. The market is also open around the clock - 24 hours a day, 5 days a week - meaning you can schedule your trading around other commitments like work and family.
If you are interested in learning more about Forex trading, check out our ultimate beginner's guide to Forex!
Some of the most popular Forex CFDs include:
- The EUR/USD
- The GBP/USD
- The USD/JPY
- The EUR/GBP
Stock index CFDs are an excellent opportunity for new traders who want to trade on the movements in markets as a whole, but are not sure about which stocks or specific instruments to pick.
Since stock indices represent a selection of stocks - for example, the DAX index represents the 30 largest and most liquid companies on the Frankfurt Stock exchange, while the S&P500 represents 500 of the US's largest companies - they can be used to gauge the performance of a market as a whole. Whilst there is no traditional way to buy or sell an index, you can trade on its performance using CFDs.
Some of the most popular index CFDs include:
- The DAX30
- The DJI30 (representing the Dow Jones)
- The FTSE100
- The NQ100 (representing the Nasdaq100 index)
Commodities can also be traded via CFDs, including metals like gold and silver, energies like oil and natural gas, and agricultural commodities like coffee, cotton and orange juice.
Where a traditional investment would entail a much higher upfront cost, not to mention storage considerations, commodity CFDs allow you to trade on the price movements of these assets without owning the physical assets themselves.
Some of the most popular commodity CFDs are:
- Spot gold
- Spot silver
- Brent crude oil
- WTI crude oil
Ready to get started? Take the first step towards trading gold by clicking the banner below and opening an account today!
Shares can also be traded via CFDs, with some unique benefits.
First, on long trades (or buy trade) you can collect dividends on the underlying shares for your CFD trade, potentially creating an additional stream of income. Like other CFD instruments, share CFDs also benefit from leverage, which allows you to access more shares than you would be able to through traditional investing. Finally, share CFDs can also be short sold, which allows you to profit in a downturn.
Some of the most popular share CFDs include:
Are you interested in learning how to trade CFD Options? Simply put, an options contract is an agreement in which the seller gives the right, without obligation, to a buyer to sell or buy an underlying instrument (a stock, index, commodity, forex pair or other). There is a predetermined price (strike price) the instrument must reach before the expiration date.
With an option CFD, instead of owning any Options contracts, the buyer/seller can speculate on the price difference between the opening and closing of an Option. When the CFD on the option expires, the trader's position is closed at the latest rate. Options CFDs generally offers greater exposure than trading other instruments.
Option CFDs are traded on different instruments, including the following popular shares:
Since 2017, cryptocurrencies have generated a lot of interest in the financial markets, led by Bitcoin. Bitcoin is without a doubt the most famous cryptocurrency, and many online brokers offer CFDs on Bitcoin - either crossed with fiat currencies like the USD or EUR, or crossed with other crypto coins like Litecoin, Ripple and Ethereum.
If you are interested in learning how to trade Bitcoin CFD, the principle of CFD trading is similar across different markets, with some slight differences, which I've mentioned above.
Some of the most popular CFDs on cryptocurrencies include:
- The BTC/USD (Bitcoin crossed with the USD)
- The BCH/USD (Bitcoin cash crossed with the USD)
- The ETH/USD (Ethereum crossed with the USD)
- The XRP/USD (Ripple crossed with the USD)
- The LTC/USD (Litecoin crossed with the USD)
As we have already covered, CFDs reflect the prices of an underlying asset. They also reflect the trading hours of those assets. With CFDs, there is always something available to trade, 24 hours a day, 7 days a week.
Here are some of the trading hours for popular types of CFDs:
- Forex CFDs: Available for trading 24 hours a day, 5 days a week
- Index CFDs: Available for trading 24 hours a day, 5 days a week
- Share CFDs: Available for trading during the hours of the relevant stock exchange
- Commodity CFDs: Available for trading 24 hours a day, 5 days a week
- Cryptocurrency CFDs: Available for trading 24/7
Across a week as a whole, trading is available on Forex, commodities and indices from midnight on Sunday evening until 11 pm on Friday, London time.
Generally, the busiest times for trading (when we tend to see the most volatile price movements) are when the different financial markets overlap. With this in mind, most traders consider the most important trading windows to be:
- London: 8am - 5pm GMT
- New York: 1pm - 10pm GMT
- Singapore: 8pm - 5am GMT
- Tokyo: Midnight - 9am GMT
Generally, the Asian session is the quietest for most instruments.
CFDs are also a useful tool for short-term trading, allowing you to capitalise on short-term price movements in the stock, index or commodity markets, without having to put up a large starting investment.
If you are thinking about short-term trading, or even scalping, it is important to choose a CFD broker that offers fast execution speeds for their trades. A good broker should be able to execute trades in less than a second, which is essential in fast-moving markets.
Another benefit of Contracts for Difference is that most CFD trades do not expire. Whilst some markets may have expiry dates built into the trade, CFDs do not. Instead, you can close your CFD positions at any time you wish.
The benefit of this is that you can make very long-term trades without worrying about them being closed before you are ready due to hitting an expiration date. Having said that, there are times when a trade may be closed on your behalf, such as, for example, if there are not enough funds left in your account.
Of course, there are some exceptions, such as CFDs on commodity futures, which have a future expiration date. That being said, you do not have to wait until the expiry date to be released from your futures contract - as you can trade it out at any given time.
Costs of Trading
Finally, the cost of trading CFDs is often lower than other forms of investments. We have already discussed traditional investments, where you need to pay the full value of the asset to invest. With lower margin requirements, CFDs have a lower cost of entry.
Additionally, CFDs have no opening or closing fees. Instead, most CFD brokers earn what is known as 'the spread'. If you look at any CFD in your trading platform, you'll see there are two prices quoted - one to buy the CFD, and one to sell it. These are known as the bid (buy) and ask (sell) prices - and the difference between them is the spread.
If you open a buy trade, or a long trade, the price of the underlying asset needs to cross the spread before the trade becomes profitable. For example, if you were trading gold and the bid price was $1,500 and the ask price was $1,501, the price of gold would need to increase to $1,501 for you to break even, and would need to increase further for you to make a profit. The $1 spread goes to the broker.
Some instruments might also have commission charges. Additionally, if you keep a trade open overnight, you might be charged an interest fee, known as the 'swap'. You can calculate the fees on a potential trade by using our free trading calculator. These charges are all fairly minimal - they tend to be much lower than traditional broking fees.
Tax may also be something to consider but will vary depending on your individual circumstance and geographical location. It is best to consult a tax specialist for further details. For example, in the UK, investors will have to pay Capital Gains Tax (CGT) if above your threshold for the year, however, no stamp duty is payable.
What Are the Risks Associated With CFDs?
As with every investment, there are risks involved in CFD trading. CFDs are complex products, which carry great risk, so it is important to do your research before you start using them.
The first risk of any type of trading is market risk. If the market moves in the direction you traded, you will make money. If it moves against you, you will lose money. This is the same as in other forms of trading and investing.
However, because CFDs benefit from leverage, these losses can be more extreme when compared to your initial investment. As we covered earlier, CFDs are leveraged products, which gives you the ability to trade a large portion of the market for a relatively small deposit. This amplifies your potential profits, but it also amplifies your potential losses.
In volatile markets, this could even lead to your balance dropping below 0, known as a negative account balance. With this in mind, it is very important to choose a broker that offers a negative balance protection policy.
Who Can Trade CFDs?
Contracts for Difference are available to trade to anyone over the age of 18. It usually appeals to traders who want to:
- Diversify their portfolio in terms of asset types
- Diversify their portfolio in terms of time frame (having both short-term trades and long-term investments)
- Try different trading strategies and styles, including intraday trading, swing trading and scalping
- Take advantage of both rising and falling markets
Before trading CFDs, it is very important to educate yourself thoroughly on the markets you intend on trading to give yourself the best chance of success. With that in mind, why not register for a free Admiral Markets webinar?
In our Trading Spotlight series, three pro traders join us three times a week to take a deep dive into the world's most popular trading topics. Click the banner below to register today:
How to Start Trading
Now that we have covered the background on CFDs, their benefits and risks, you are probably wondering how you can start trading with them or how to trade CFDs online. There are a few steps involved, but we have broken it down into a simple guide to help you on your way! Here's how to trade CFDs online:
Step 1: Create a Trading Account
To trade CFDs, you need to open a trading account with a CFD broker. This could be a live account, where you deposit money and use that to trade on the financial markets, or it could be a demo account, which allows you to get to know the software and practice your skills with virtual money.
To open a demo account, simply follow these steps:
- Go to the demo account page and complete the form.
- Your demo account details will appear on the page, and will also be emailed to you.
- Proceed to Step 2 where we will explain how you can download a trading platform.
If you would like to open a live account, follow these steps:
- Create a Trader's Room account. Trader's Room is a dashboard where you can manage your live and demo accounts, deposit and withdraw funds, and download trading software.
- You will get an email with your account details - just click the link to activate your account.
- Once your account is activated, you can log in here.
- Click the 'Open live account' button to start your account application.
- Enter your details, keeping in mind that you will need documents to verify your identity, like a passport.
- Once your application is reviewed, you will receive the results by email.
Step 2: Download a Trading Platform
Picking the right trading platform is one of the first things to consider when learning how to trade CFDs online. In fact, it will probably be one of the considerations you have when choosing a broker.
In fact, you don't need a CFD trading platform specifically designed for trading only CFDs. If your broker offers CFDs then you'll be able to trade them on the platform they work with.
Admirals uses the most popular platforms in the trading world, MetaTrader 4 and MetaTrader 5. They are designed specifically for trading both CFDs and Forex. So, you may call them CFD trading platforms (although that's not solely what they are).
The MetaTrader platforms have advanced charting features, technical indicators and a large support community. These platforms are also some of the most stable, user-friendly and accessible on the market, making them excellent CFD trading platforms.
At Admirals, the available MetaTrader platforms we offer include:
- MetaTrader 4 and 5 on Windows and MAC
- MetaTrader 4 and 5 on iPhone and iPad tablets
- MetaTrader 4 and 5 for Android and tablet PCs
- MetaTrader WebTrader for browser-based trading
Step 3: Choose Your Trading Methodology
Now that you have your CFD trading platform and all of the foundations in place, the next thing to think about when learning how to trade CFDs online is your trading methodology. With so many potential trades available across so many markets, it is important to have a plan of attack.
Here are some of the elements to consider in your trading approach:
- Routine: When will you look at the markets each day? Will you be watching them constantly or would you like trades to automatically open and/or close when you are not at your desk?
- Trading Style: What kind of trader are you? Day trader, scalper, swing trader or will you manage long-term trades?
- Markets: Which markets will you focus on? Shares, Forex, commodities, indices or crypto?
- Strategy: How will you make trading decisions to buy, sell or exit a position at a profit or loss?
- Risk management: What position size, stop losses and take profits will you set to limit your risk?
- Support: How often can you educate yourself by reading the library of educational articles and tutorials on offer to further develop your skills?
You may not know the answer to some or any of these questions yet - don't worry, we will be going into more detail about trading styles, manual vs. automated trading and more, which will help.
In any case, it is important to remember that trading is a practical endeavour, where opening a live or demo account and watching how markets move can help you understand much more about trading the world's financial markets.
Step 4: Make Your First Trade!
The most exciting step in learning how to trade CFDs online is making your first CFD trade on a live or demo account. Just follow these steps:
- Open your MetaTrader trading platform and log into your trading account.
- Go to the 'Market Watch' window - if it is not already displayed, press Control + M to bring it up.
- Double click on the instrument of your choice.
- Choose the number of lots in the order window (this is the size of your position - we will discuss it in more detail under 'calculating CFD profits and losses').
- Click on 'buy' if you think the CFD will increase in value, or 'sell' if you think the CFD will decrease in value.
- Your trade will open, and it will appear in the 'Toolbox' window as an active trade.
- To close your trade, double click the active trade and click the 'Close' button.
Once you have closed your trade, it will appear in the 'History' tab of the Toolbox window.
To see the full process, in the platform itself, watch the video below:
Open a Live Account and Start Trading Now
If you're feeling ready to start putting this knowledge into practice and trading CFDs, the Admiral Markets live account is the perfect place for you to start! Trade CFDs on the following:
- 40+ Forex currency pairs - choosing from a range of Forex majors, Forex minors, and exotic currency pairs
- 20 Indices
- 3,000+ shares
- 380+ ETFs
- Commodities - Metal, energy and agricultural
- Bonds - German bund and US Treasuries
- And more
You also get access to the latest technical analysis and trading information. Trade the right way and open your live account now by clicking the banner below:
Finding Your Trading Style
When you are thinking about your trading approach and which CFD trading signals you want to trade, one of the things you'll need to consider is your trading style. Many trading styles start with the time frame in which you want to trade, ranging from scalping, where trades are executed within minutes, to longer-term trading.
'Scalping' is a type of trading where trades are usually opened and closed within minutes. In most cases, scalpers only target a few pips per trade (a pip is 0.0001 of a CFD's value). Because of this, scalpers often need to make high-volume trades and use high leverage to make a significant profit.
This can be exciting in volatile markets, but it is also very risky, as you can lose money just as quickly as you can make it. With this in mind, most beginners would be better suited to longer-term trading styles.
Day trading is when a trade is opened and closed on the same day, so trades might last for several hours. Day traders often try to trade on changes in market directions, which can make the approach similar to scalping, since it is trading in response to the market reactions, just on a longer time frame.
Swing trades usually range from being one day in length to one week in length. The objective of swing trading is to take advantage of the momentum of the market, whether bullish or bearish.
In CFD trading, 'long term' refers to any trade that is longer than a week. Although long term trading can be based on technical analysis, in most cases this style considers fundamental analysis and what macro data has to contribute to the markets.
Manual vs. Automated trading
Beyond trading styles, the way trading is carried out can also vary from trader to trader. Most trades are either manual or automated.
This is where a trader manually makes the decision to buy or sell, and is physically clicking buttons (or setting pre-determined stop losses and take profits) to make trades.
For decision making, the trader can rely on different types of analysis such as fundamental, technical or wave analysis. Some experts recommend that new traders start with a manual trading strategy, simply because this is a good way to learn about the markets and how they work. However, this type of trading can be complicated since new traders do not have a clear strategy yet, which means they can struggle to maximise the profitability of their market entries and exits.
CFD trading can be partly or fully automated, with programs available that can highlight trading opportunities for a trader, and others available that can even open and close trades on a trader's behalf.
These programs use algorithms based on a trader's requirement that indicates the best time to enter or exit a trade. The main benefit of this type of trading is that it takes the emotion out of trading and forces you to follow your strategy.
If you are considering automated trading, we recommend performing numerous tests with any new program or robot so you feel comfortable with its performance. Fortunately, MetaTrader allows traders to backtest trading strategies on historical data, which allows you to see how a strategy might have performed in historic scenarios.
In fact, one of the best tools for automated trading is MetaTrader Supreme Edition - a free MetaTrader plugin available exclusively to Admiral Markets traders. With MetaTrader Supreme Edition, traders can boost their trading capabilities by accessing the latest real-time market data, insights from professional trading experts, and a range of additional features such as a range of expert advisors, which allow for automated trading. To download MetaTrader Supreme Edition for free, click the banner below!
Calculating Profits and Losses
Once you are ready to start trading, you will probably want to figure out how to calculate potential profits and losses before you trade.
The good news is that we have a handy trading calculator that can do this for you! However, if you want to understand how these calculations are made, keep reading.
1) Price Differences
The first step for calculating the gains or losses of a trade is quite simple. It is the difference between the value of an asset at the time of opening a trade and the value of the asset at the time the trade is closed.
In long trades, you can calculate this by subtracting the opening price of a trade from the closing price of a trade. In short trades, you can calculate this by subtracting the closing price of a trade from the opening price.
So if you opened a long trade on the EUR/USD at 1.1073 and closed it at 1.1152, the difference is 0.0079 (or 79 pips).
2) Trade Volume
Now that you know the price difference, you need to multiply it by the size of your trade. Lots, or contract size, are the standard amount that each contract is worth, which varies among CFDs.
In Forex pairs, for instance, one lot is 100,000 units of the base currency, or the first currency listed in a Forex pair. So one lot of the EUR/USD is worth €100,000, while one lot of the AUD/USD is worth AUD 100,000. If these numbers are feeling a bit large, the good news is that many brokers like Admiral Markets also offer mini lots (0.1 lots) and micro lots (0.01 lots), which allow you to open smaller positions.
Source: Admiral Markets Trading Calculator
For metals like gold and silver, one standard contract is 100 ounces, while the contract size for indices like the FTSE100 and DAX30 is one CFD.
To calculate your total trade volume, you simply multiply the number of contracts by the total size of the contract. So three mini lots of the EUR/USD would be valued at $30,000 (0.1 x 3 x €100,000 = €30,000).
3) Point Movement Value
The next step is to calculate the value of each point movement. Again, this can get confusing because it varies from asset to asset, which is why it is helpful to use our trading calculator to look up the specific instruments you are interested in trading.
For currency pairs, the formula to figure out the value of a pip is to multiply one pip by the contract size - this gives you the value of one pip in the quote currency (the second currency in the pair). So for one lot of the EUR/USD, the formula would be:
0.0001 x 100,000 = $10
Therefore, every one pip movement is valued at $10. For a mini lot (0.1 lots), that would drop to $1, and for a micro lot, that would drop to $0.1.
If we put all three points together, you can use that to start calculating your trading profit or loss. To calculate your trade's profit or loss, you need to multiply the price difference by the trade volume by the point movement value.
(closing price - opening price) x (contract size x number of contracts x contract value) x (point size x contract size)
To go back to our example earlier, let's say you opened a long trade on three mini lots of the EUR/USD at 1.1073 and closed it at 1.1152. This gives us:
(1.1152 - 1.1073) x (0.01 x 3 x €100,000) x (0.0001 x 10,000)
0.0079 x €30,000 x $1 = $237
The same formula works for calculating trading losses - the price difference will be negative, and this will lead to a negative result, or a loss.
4) Trading Costs
There are three potential costs involved when trading CFDs - the spread, commissions and swap fees.
Generally, there is a difference between the bid and ask price - this is known as the spread, which we looked at earlier. If we return to our EUR/USD trade, if the Forex pair has a one pip spread (so that means a difference of 0.0001 between the bid and ask prices), the pair needs to move by at least one pip before it becomes profitable.
So, in the price difference we calculated before - 79 pips - you would need to subtract one pip to calculate your profit.
This is why so many brokers promote their low spreads - because spreads eat into your trading profits, one of the things to look for when choosing a broker is what kind of spreads they offer.
Here are some examples of typical spreads on some of the most popular CFDs at Admiral Markets:
|CFDs on Forex|| |
|Index CFDs|| |
|CFDs on Commodities|| |
|CFDs on Cryptocurrencies|| |
|Stock CFDs|| |
The next cost of trading is commissions. Depending on your broker, a commission might be charged in addition to the spread or instead of the spread. They also tend to be charged for certain underlying instruments, like share CFDs.
At Admiral Markets, we charge commissions from just $0.01 per share on our CFD accounts in MetaTrader 4 and MetaTrader 5. Additionally, we offer advanced traders the Zero.MT5 account, which charges commissions on commodity, index and Forex CFDs, but offers spreads from 0 pips.
The third charge is the swap, which is the interest adjustment charged for holding a position overnight. In long trades, this is charged as a fee and is deducted from a trade's profit, while in short trades it may be paid as a rebate, and added to a trade's profit.
Can You Get Rich Trading CFDs?
New traders often ask, "Can you get rich trading CFDs?" Some of them are eager to get into trading with hopes of cashing in big. The answer to this question is the same for all markets, whether you are interested in getting rich trading CFDs, shares, commodities or in any other market.
It is possible to get rich trading, however, it is not easy. Great results come with hard work and in trading, it's no different.
A sound trading strategy that is founded on education, experience, growth and thorough risk management are key traits that each successful trader has carried in their trading. Even with these traits accounted for, there are factors determining success that are out of human control.
You can find examples of traders who have become very wealthy trading, along with some intriguing anecdotes from their trading journey in our article, Top Three Best Forex Traders Ever.
It's time to look at some tips that will help you achieve success in your trading.
Seven Trading Tips For Beginners
Becoming a successful CFD trader is not easy, it takes a lot of learning and practice. This is why beginner traders need to educate themselves thoroughly before trading the live markets. There are a range of free resources you can use to do this - free articles, online trading courses and even live webinars taught by trading experts.
1. Let Winning Trades Run and Cut Your Losses
Many new traders (and even some more experienced traders) limit their potential profit by not following this rule. Simply, a winning trade should be allowed to run until it achieves maximum profitability, while losing trades should be cut as soon as possible.
This can be difficult for new traders to assess, which is why it is always a good idea to start trading with a demo account, which will help you understand how the markets work and what winning and losing trades look like.
2. Trade With Logic, Not Emotion
A trader who bases decisions on emotions, intuition and gut feelings may occasionally win, but this approach is not profitable in the long term. Instead, profitable CFD traders have strict trading rules and follow them at all costs. Part of learning to trade successfully is simply learning to follow your rules.
3. Don't Put All Your Eggs in One Basket
A trader who risks 50% or 100% of his capital in a single trade is not a trader - what they are doing is the equivalent of gambling. One of the most common risk management guidelines is not to risk more than 2% of your account balance on a single trade - this ensures that a single losing trade doesn't clear your account balance or trigger a margin call.
Beyond risking all your capital on a single trade, it is also important to ensure that all of your trades aren't on the same instrument or market. Investing in different instruments and sectors will help ensure your portfolio is diversified.
4. Combine Fundamental and Technical Analysis
When performing analysis, a trader who uses both fundamental and technical analysis is more likely to be successful than someone who uses only one of these analyses in their trading. One way to combine these approaches is to use fundamental analysis to trigger trades, and technical analysis to monitor and decide when to close the trades.
5. Trade at the Right Time
Even if you have correctly identified a trend, opening a trade too soon or too late can lead to significant losses. It is better to wait until you receive a trading "signal" - such as an asset's price breaking through support or resistance, or a moving average crossover. Ideally, the potential trade should be confirmed by more than one signal.
6. Don't Try to Save Losing Trades
It's common for new traders to invest even more in a losing position with the hope that the market will turn around and they will recoup their losses. This is not a good practice. If a trade is not behaving in line with your expectations, close it.
It is better to accept some losses early than to keep a trade open and potentially lose your entire account.
7. Use Stop Losses Wisely
A stop loss is a tool you can use to limit your trading losses. Simply, you set a predetermined price at which your trade should automatically close if the markets turn against you.
A trade without a stop loss can have catastrophic consequences. However, if you place it too close to the current price, it might also close out a winning trade before it has time to reach a profit. This is why it's important to use stop losses wisely - in a way that balances safety with opportunity.
Choosing the Right Broker
If you are wondering where to find the best CFD broker and CFD trading platform, you might start by asking around in trading forums. Unfortunately, these are not the best place to look. In these forums, there is often an affiliate agreement between the forum and the broker, which means the reviews may not be genuine.
Instead, here is a list of items to keep in mind when choosing a broker:
- Are they regulated?
- Do they offer an intuitive and fast trading platform?
- Are their trading costs competitive?
- Do they offer training and education, ideally for free?
- Do they have good customer service?
- Do they offer the markets you want to trade?
Admittedly, our opinion is subjective, but we believe that Admiral Markets is one of the best CFD brokers you can find. Here are just some of the benefits of trading with us:
- High security: Admiral Markets is regulated around the world by the FCA, ASIC, EFSA and CySEC.
- World-class trading platforms: We offer trading on MetaTrader 4 and MetaTrader 5, the world's most popular trading platforms, and we offer downloads to PC and Mac, both Android and iOS apps, as well as browser-based trading via MetaTrader WebTrader.
- Low trading costs: Our typical spreads are some of the lowest available - just 0.6 pips on the EUR/USD, and 0.8 points on the DAX30 CFD! Plus our commissions start from $0.01 on US share CFDs and ETFs.
- Free education: Enjoy a library of educational materials and market analysis from our Trader's Blog so you can stay up to date with all the latest market developments.
- Award-winning customer service: While we're a global company, we offer local support, with teams in 30+ countries who speak your language, and who are available via email, live chat and phone.
- Wide range of markets: Admiral Markets offers CFDs on thousands of global markets, including Forex, shares, commodities, indices, ETFs, cryptocurrencies and more!
- Negative balance protection policy: We can help keep your account balance from sliding to a negative balance with an unlimited negative balance protection policy for Retail clients, and negative balance protection of up to £50,000 for Professional clients.
- Free SMS trading notifications: Stay up to date with all the information you need regarding deposits, withdrawals or possible margin calls by registering for the free SMS service found in Trader's Room.
- Trade with leverage: Retail clients can trade positions valued at up to 30 times their account balance, while Professional clients can trade positions up to 500 times their account balance.
- Trade in any direction: Trade CFDs long or short to profit in both rising and falling markets.
As you can see, CFD trading offers the opportunity to trade a wide range of markets for a relatively low deposit. With the use of leverage, you can amplify your profits (and losses) and with the ability to go long or short you can profit in both rising and falling markets.
Having said that, like any form of investing, there is the potential to lose money as well as to make it.
This is why it's important to educate yourself. Ensure you have a good knowledge of the markets, a reliable trading strategy and a fast trading platform to maximise your chances of profitability.
Trade With Admiral Markets
If you're feeling inspired to start trading, or this article has provided some extra insight into your existing trading knowledge, you may be pleased to know that Admiral Markets provides the ability to trade with Forex and CFDs on up to 80+ currencies, with the latest market updates and technical analysis provided for free! Click the banner below to open your live account today!
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.