How to trade CFDs

Learn what CFD trading is

CFD trading is the buying and selling of contracts for difference – which are financial derivatives that let you take a speculative position on whether an asset (including shares, indices, cryptos, commodities and forex) will rise or fall in value.

Your first step towards trading CFDs is to learn how they work. Read our quick introduction: what is CFD trading and how does it work?

There are also different ways to trade CFDs: via spot markets and via futures.

• Spot trading is best for shorter-term trading as the spot price is the immediate real-time price of the asset
• CFD futures are best for medium to longer term trades as they allow you to speculate on the price that the underlying asset will be on a specific date
  

Decide whether to buy or sell

With CFDs, you can take a ‘buy’ or ‘sell’ position on an underlying market. You’d ‘buy’ if you thought the price was going to rise, and you’d ‘sell’ if you thought it was going to fall.

CFDs are leveraged, meaning that you can receive full market exposure for a deposit, known as a margin. Your margin is a product of leverage – think of it as the deposit with which you open the position. Trading on margin enables you to get exposure to the full value of the trade without committing a higher value upfront.

So, if you wanted to open a CHF1000 position on Apple shares, you’d put down a margin of CHF50 (5% of the position size). It’s important to remember that, while leverage can help to amplify your profits, it can also increase your losses. This is because your profit or loss will still be calculated on the full size of your position.

The difference in price between the ‘buy’ price and ‘sell’ price for an asset is called the spread.

You’ll need the current market price to pass above our buy price when going long, or fall below our sell price when going short, in order to make a profit. The difference between these two amounts is called the spread.

The spread is the difference between the bid and ask prices and varies depending on market conditions. In most cases we charge our own spread on top of the market spread, as our fee for the trade. Spread charges apply to CFD trades for all markets except shares.

For every shares CFD trade, you’ll pay a commission instead of a spread.

Set your stops and limits

Once you’ve decided on what to trade and the position size (and margin) you want, it’s time to set stops and limits. Because a trade’s profit or loss is only calculated once it’s closed, stops and limits are parameters that close your trade for you automatically once it has reached the level of profit or loss you’re comfortable with.

In this way, your stops and limits help you to calculate potential profits and losses from your CFD trades. They can also be useful ways to lock in your profits, or to minimise your exposure to risk.

Under the ‘size’ button, choose an amount for your stop order, or ‘stop’ as it is known, which is an order to close your trade when the market price moves to a level which is less favourable to you. A limit order or ‘limit’ is the opposite: an order to close the trade when the market moves to a level which is more favourable to you.

Monitor your CFD trade and close your position

As soon as you’ve opened your trade by clicking ‘place deal’, you can watch your trade in real time on our platform to see how you’re doing. You can monitor all your open CFD trades within our award-winning platform¹ and, when you’re comfortable with the profit you have made – or wish to limit any more loss – close your position by clicking the ‘close’ button.

Your profit or loss is calculated by multiplying the amount the market moved by the size of your trade in pounds per point.

CFD trading examples

We’ve put together some CFD trading examples to guide you through the process of trading CFDs on a range of markets including shares, indices, cryptos, commodities and forex.

1. Share CFD trade example:

Shares of Lloyds Banking Group PLC are currently trading at 51.615 with a buy price of 51.630 and a sell price of 51.600. You anticipate that the stock is going to increase in value over the next few days, so you decide to buy 150 share CFDs of LLOY at 51.630.

Say the Lloyds share price did climb and was trading at 52.615 with a new buy price of 52.630 and sell price of 52.600. You would close your position by reversing your initial trade, selling 150 share CFDs of LLOY at 52.600. To calculate your profit, you’d multiply the difference between the closing price and opening price of your trade by its size. In this case, your profit would be CHF145.50 ([52.600 – 51.630] x 150), excluding any additional costs.

However, if the Lloyds share price had decreased to 50.515 (buy price 50.530 and sell price 50.500) and you had closed your position by selling the shares at the new sell price, you’d make a loss. You could calculate this loss as the difference between the closing price and opening price of your trade by its size. In this case, that would be a loss of CHF154.50 ([51.530 – 50.500] x 150 share CFDs), excluding any additional costs

2. Index CFD trade example:

Let’s say that you wanted to speculate on the FTSE 100 index going up, above its current price of 6900 (buy 6901.2, sell 6898.8). So, you buy 100 CFDs at the buy price of 6901.2. If you predict correctly and the FTSE 100 price goes up to £6911 (buy 6912.2, sell 6909.8), and you close your position by selling your CFDs at the new sell price of 6909.8, you’d have made a profit of £860 ([6909.8 – 6901.2] x 100 CFDs).

If the index moves against you and you decide to close your position, you’d make a loss. For example, if the price drops to 6890 (buy price 6891.2, sell price 6888.8), you’d close your position by selling at the new sell price of 6888.8) In this case, you would have made a loss of £1240 ([6901.2 – 6888.8] x 100 CFDs).

Commodities CFD trade example:

Let’s say you decide to trade CFDs on the price of platinum, trading at 1218.55, with a buy price of 1218.80 and a sell price of 1218.30. You think platinum will go up, so you go long and buy 100 CFDs at 1218.80. The price of platinum does go up to 1250.25, with a buy price of 1250.50 and a sell price of 1250. You close your position by selling at the new sell price of 1250. You would then make a profit of $3120 ([1250 – 1218.80] x 100 CFDs).

However, let’s say the platinum price drops to 1211.50, with a buy price of 1211.75 and a sell price of 1211.25. You decide to close your position by selling your CFDs at 1211.25, which means you’ll incur a loss of $755 ([1218.80 - 1211.25] x 100).

3: Forex CFD trade example:

GBP/CHF is trading at 1.32585 with a buy price of 1.3259 and a sell price of 1.3258. You believe that GBP will strengthen, so you decide to buy five contracts at 1.3259. Currencies are traded in lots, where one GBP/CHF lot (contract) is the equivalent of trading £100,000 for CHF132,590. This means your position size will be £500,000 (CHF662,950) – because you are buying five contracts. However, the margin is 2.5% so you’ll need to put up CHF16,573.75 to start trading.

If GBP/CHF rises to 1.33185 with a buy price of 1.3319 and a sell price of 1.3318 and you decide to close your position, you’ll make a profit. So, you reverse your trade to close your position, selling five contracts at 1.3318. Your £500,000 is now worth CHF665,900 [new sell price of 1.3318 x (100,000 x five CFDs)]. Your profit is £3911.41 [(CHF665,900 - CHF662,950) x your buy price of 1.3259].

If GBP/CHF falls to 1.31885 instead, you might decide to close your position to prevent any further loss. The new buy price is 1.31890 and the sell price is 1.31880, so you sell five contracts at 1.31880. Your £500,000 is now worth CHF659,425, calculated as [1.31880 x (100,000 x five contracts)], which means your loss is £4717.60 [(CHF662,950 - CHF659,400) x your buy price of 1.3289].

Just remember that, with spot market trades, you’ll need to pay any overnight funding charges if you hold your position past 11pm (Swiss time). Plus, you’ll have to pay capital gains tax on your profits. If you want to avoid overnight funding, try futures instead.