How to trade CFDs

Contracts for difference (CFDs) are versatile derivative trading instruments that can be an integral part of your trading portfolio.

With CFDs being added to more and more traders’ portfolios, we look at some of the reasons they’re growing in popularity and how they can be traded.
 

Trade CFDs in a rising or falling market

With CFD trading you can take advantage of trading in a falling market as well as a rising market – unlike traditional shares trading.

As you don’t own the underlying asset when CFD trading, you can choose to either go long (buy) or go short (sell) on the position.

Trade CFDs as a form of hedging

Traditional equities traders tend to capitalise on the ability to go short on CFDs, and use this as a means to hedge their physical trading portfolio.

‘Hedging’ is the act of decreasing your risk. In trading, if you believe your assets are at risk from a market movement, you can offset the potential losses by placing a trade in the opposite direction – this is what’s known as hedging.

CFD trading examples

Let’s look at a couple of examples on how to trade CFDs.

 

Example 1

You identify a pattern on our charts and want to go long 3 contracts on the SPX500 at 1960.50.

The margin required for the position is going to be 1960.5 x 3 / 200 (in the case of a 200:1 leverage) = 29.41 USD.

Five minutes before close, the market price is 1980.7 and you decide to take your profit rather than risk an overnight move against you.

The profit made on this position is 1980.7 - 1960.5 = 20.2 points.

With 3 contracts, each point is worth 30 USD, so the final profit is 20.2 x 30 = 606 USD.

Example 2

Some bad news is coming from the German banks and you anticipate a fall in the price of the DAX. You decide to go short 5 contracts of GER30 at 9810.00.

Despite the bad rumours, the market keeps pushing up and is trading at 9960.00.

You decide to close to avoid a bigger loss.

The loss will be 9960.00 – 9810.00 = 150 points.

5 contracts = €5 per point.

The total loss will be 150 x 5 = €750.

Start trading in less than 5 minutes


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Losses can exceed deposits

Losses can exceed deposits. Ensure you fully understand all risks involved and seek independent advice if necessary.

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