Beginner’s Guide to CFD Trading

We cover CFD trading for beginners.

Updated: January 15, 2024
Matt Crabtree

Written By

Matt Crabtree

 

In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.

Peter Lynch (Source)

Because of the huge leverage available and the diversity of the financial markets, novice CFD traders have a lot to consider. You've found the ideal site if a CFD trading tutorial for beginners is what you're seeking.

In this primer, you'll learn the fundamentals of CFD trading, such as the most effective tactics and where to go to discover the right platform, all from the ground up.

Here is a quick beginner’s guide to CFD trading.

Key Things to Know about Contracts for Difference Trades

  • CFD stands for Contract for Difference — it’s based on the price of an asset between the opening and closing periods of a position.
  • The most important aspect of CFD trading is that investors never take physical possession of the underlying product.
  • Instead, they bet on the direction they think the price will go 💨. 
  • This is especially helpful for newcomers since, for instance, they may bet on the price of crude oil rising without actually having to store any of it. But it takes strong accurate signals to win. 

UK Best Stock and CFD Trading Apps

Beginner’s Guide to CFD Trading — Overview

The abbreviation “CFD” refers to a contract between two parties to pay the difference in the price of an asset between the opening and closing periods of a position, as implied by the name. 

The most important aspect of CFD trading is that investors never take physical possession of the underlying product but instead bet on the direction in which they believe the price will go — this can be especially helpful for newcomers since, for instance, they may bet on the price of crude oil rising without actually having to store any of it.

Introduction to Margin CFD Trading

This trading type is an aggressive and high-octane way to try to quadruple your savings. You win fast and often lose faster (most people lose on CFD bets). 

Leverage is one of the main attractions of CFD trading for novices.

Margin trading entails putting up a small percentage of an asset's value and having a broker finance the remainder. Leverage allows you to acquire a huge stake with a smaller initial outlay of capital. Brokers often charge a commission of anywhere from 5% to 20% of the entire price of an asset you trade.

For those unfamiliar with leveraged CFD trading, this example might help clarify the idea. Let's pretend Tesla’s share price is £90 and your broker provides CFDs on equities with a 10% margin — a contract for difference (CFD) for one share will cost you £9, and your broker will lend you the other £81 to make the purchase. 

If the share price increases to £100 and you terminate your position, you will refund the money borrowed to the broker (£81), get your original investment back (£9), and earn an additional £9 (less any expenses). But if you borrow money from a broker and end up losing money, you still owe the broker the same amount you borrowed. 

If you're just starting out in the world of CFD trading, keep in mind that the potential rewards may or may not outweigh the potential risks and that you shouldn't risk more than you can afford to lose.

Getting Started with Beginner CFD Trading

Finding a good trading broker is the first step for novices in CFD trading who already have awareness of what they can afford to lose and want to bet in. Top CFD providers will let you practise trading with virtual money in a demo account — this gives you full access to all of the markets and tools available to real account holders. 

Therefore, you can test out your trading techniques using actual market data without putting any money at risk. They are also an excellent method of discovering whether or not the service meets your needs. Some more red flags to watch out for while choosing a CFD broker are as follows:

#1 — Unknown Platform

One of the most important aspects of CFD trading for newcomers is the platform they use. You'll need a trustworthy and simple platform. MetaTrader 4 (MT4) and MT5 are both good options, but which one is best for you will depend on your trading style and volume. These two are widely used by professionals in the day trading sector because of the wealth of features and resources they provide. 

A mobile app might be the way to go if you plan on taking a more laid-back approach to investing.

The vast majority of established businesses provide customers with proprietary apps that may be installed for free on their iOS or Android devices. The resulting trading process may be less complicated.

#2 — Any Upfront Costs 

There are no upfront costs associated with creating a trading account for novices to engage in CFD trading. Spreads, commissions, margin losses, and overnight exchange fees are how CFD brokerages generate money.

When you deposit or withdraw money from your brokerage account, certain firms may charge you a fee. There might be a minimum deposit required or a minimum transaction size you must meet. When selecting a broker, it is crucial to compare the costs they charge for various trading services.

#3 — No Provable Licenses

Third, be sure the brokerage you choose is licenced; there are dishonest brokers in the industry. If not, try to find ones that are supervised by reputable organisations like the Financial Conduct Authority (FCA) in the United Kingdom or the Cyprus Securities and Exchange Commission (CySEC) in Europe. 

Finding a broker that is licenced in your local country is the safest approach to start trading CFDs as a novice.

If you are a citizen or permanent resident of the United States, the Securities and Exchange Commission (SEC) will have vetted the finest CFD brokers for you to use. You can't lose more than your original investment, thanks to the negative balance protection offered by these organisations.

Pro Tip: Customer service — In the event of a malfunction that puts your funds in jeopardy, you'll want access to helpful and available support staff. The availability of a website's live chat feature is an indicator of how quickly you may expect a response from the company. As an alternative, many people choose to contact assistance by e-mail, phone, or social media.

Trading Techniques for Contracts for Difference

When first starting out in CFD trading, there are two basic order types you'll encounter: the Long Buy and the Short Sell… Let’s go through each: 

What Are Long-Term Buys?

Those who anticipate an increase in the value of an asset, such as gold investments, will first “purchase” the asset with the conviction that it will increase in value, also known as opening a long position.

It is essential to keep in mind that while trading CFDs, you are never truly “purchasing” the asset. In its place, you are making a speculative purchase of a contract on the future value of the underlying asset.

Your broker may allow you to purchase a CFD for 100 ounces of gold at a margin of 5% if the price of gold per ounce is £1,500 and your analysis indicates that it will increase. You may save a lot of money on a deal that would normally cost you £150,000 by instead purchasing a contract for difference (CFD) instead.

You can figure out how much money you made or lost by multiplying the per-unit pricing differential between now and when you started selling (in this case, 100 ounces). If the gold price increases by £100, from £1,500 to £1,600, you will have profited £10,000 (£100 multiplied by 100 ounces). A loss of £50 multiplied by 100 ounces would cost you £5,000 if the price dropped to £1,450.

Keep in mind that a CFD broker will charge you a fee, normally in the form of a spread and/or a commission, when you trade with them.

What is Short Selling?

Short selling is often portrayed as the more complicated of the two order types. However, it is only the long buy's polar opposite. By borrowing an item from a broker, selling it, and then repurchasing it at a reduced price, you may theoretically make a profit (or loss).

You give the asset back to the broker and pocket the profit when you terminate the trade. When you are certain that an asset's price will go down is the greatest time to do this.

Let's say you're persuaded the gold price is about to plummet from its current record high of £2,100 an ounce. It's possible to initiate a short position with a margin of 5% using a CFD to sell 100 ounces of gold at £2,100 per ounce.

The overall price tag is £10,500 (5% of £210,000 equals £10,500) due to the high price of gold. If you forecast that the price of gold will fall to £1,900 and you're right, your final profit will be equal to the starting price less the current price per unit multiplied by the size of your position. Assuming you sell 100 units at £200 each, your profit will be £20,000.

It is important to note that high losses could occur as well.

Keep in mind that a CFD broker will charge you a fee, normally in the form of a spread and/or a commission, when you trade with them.

Education — How to Learn CFD Trading as a Beginner

If you're serious about studying CFD trading, you'll want to complement what you'll find in this beginner's guide with additional resources. The most important resources for novices to learn about CFD trading are:

Courses on trading are widely available online, and many sites cover the basics of CFD trading. To learn how to trade CFDs, get personalised recommendations, and pose questions to industry professionals, several trading schools and academies provide advanced online trading classes.

It is important to shop around for the best course for you since there is a vast variety of approaches, costs, and delivery mechanisms.

Most brokers also provide trading education portals, so you may learn all you need to know about CFDs right alongside their platform. Training programmes for brokers might include access to a virtual trading environment where students can hone their skills using simulated funds and real-world market data.

You may find out more about the resources your broker provides and how to use them effectively by consulting resources designed for your platform of choice. Candlestick charts for trend analysis, ROI calculators, and automated trading bots are all examples of such tools. 

Another is news! Stay Up on Opportunities!

Online discussion groups are a great place to network with other investors and get insight into the latest market trends and successful trading techniques. Forums dedicated to “CFD trading for beginners” may be found on the web and social media.

YouTube also has a wealth of free, in-depth CFD lessons. Just remember that trading is player-versus-player unless you’re working with very trusted parties. 

Guidelines for Getting into a Career in CFD Trading

First, you need to settle on a trading approach and methodology that works for you. Here are some common approaches for those just getting started with CFD trading.

1. Scalping

Day traders often use a tactic known as “scalping.” The objective is to spread your risk by making several modest winning deals in a single day, adding up your gains as you go. For inexperienced traders, scalping may be a smart, albeit demanding, strategy for making consistent daily gains.

Though some manufacturers provide programmable bots and algorithms to carry out actions at certain moments, the manual implementation of this method necessitates a significant investment of time and effort.

2. Long Trading 

Futures contracts on CFDs may be kept for indefinite amounts of time since they do not expire. If you're a newbie considering engaging in long-term CFD trading, it's important to remember that you may pay expenses like interest and overnight holding fees.

3. Using Leverage

Using leverage to purchase CFDs means paying just a fraction of the full price of an asset (the margin) and having your broker loan you the difference. Margin requirements for trading other products with leverage are higher than those for trading CFDs.

Leverage and margin might further complicate things for newcomers to CFD trading, but both terms relate to increasing a position's size beyond the trader's available funds. The margin requirement is often expressed as a percentage (5%), whereas the leverage is typically expressed as a ratio.

Take the hypothetical price of £200 for one share of Tesla Motors. A CFD with a 5% margin from your broker would cost £10 per share. If your broker provides these with leverage of 1:20, for example, you would only have to put down 20% of the initial investment. It costs £10 if you split 200 by 20.

When marketing investing services, CFD trading for beginners and dummies guides typically gloss over the fact that margin (or leverage) amplifies both your gains and losses. Because of this, inexperienced traders may make the error of trading too much.

📚 Read my breakdown of the top CFD trading platforms to learn all you need to know about trading CFDs.

Last Word For Novices Considering CFD Trading

With such a large selection of reputable brokerages providing access to CFDs on widely traded financial indices, even novices may find success in trading. There are still major dangers, however, therefore further study and application are needed to reduce losses.

The good news is that there is no shortage of ‘CFD trading for beginners' PDFs, books, and other resources to help you learn the ropes and get started.

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