A quick guide to CFD trading

Curious about CFD trading but feeling lost on how to start? Perhaps you’ve been scrolling through your search engine, pondering the question: What is CFD trading?

For those looking to access diverse financial assets without owning them, Contracts for Difference (CFDs) could be a promising avenue. But what do CFDs entail, and what other essentials should you grasp before delving into CFD trading? Together with IG Group, a FTSE250 listed trading platform founded in 1974, we’ve created a quick guide to CFD trading to help you start your journey.

What is CFD trading?

CFD trading is the method of speculating on the price movements of various assets, such as shares, indices, commodities, cryptocurrencies, and forex, on a trading platform. In other words, when you enter into a CFD agreement, you are essentially entering a contract with a broker to speculate on the price fluctuations of various assets in financial markets without the actual buying or selling of physical assets. This allows you to avoid the restrictions and costs typically associated with traditional trading methods.

When trading CFDs, your profits and losses depend on whether the market goes in the direction you predicted. If it does, you make money; if not, you lose. You realise these gains or losses when you close your position by selling the contracts you bought. For instance, if you expect Meta’s stock to rise, you can open a Buy CFD position and aim to sell it later at a higher price for a profit. This is known as “going long.” Conversely, if you anticipate Netflix’s stock will fall, you can open a Sell CFD position and close it at a lower price to make money. This is known as “going short.” Your potential profit or loss is determined by the difference between the opening and closing prices minus any fees incurred.

How to start CFD trading

1. Learn everything there is to know about CFD trading

To start CFD trading, the first step is to learn everything about it. CFD trading offers several advantages, such as lower fees and the ability to short-sell easily. However, it’s important to note that CFD trading comes with risks.

Therefore, to be successful in CFD trading, you need to educate yourself on how they function and differentiate them from other financial products. Start by learning how CFD profit and loss works, how to place a trade, the timeframes, and the associated costs. Don’t forget to familiarise yourself with potential pitfalls so you can make informed decisions before engaging in CFD trading.

Take advantage of free learning resources like IG Academy’s trading courses and webinars offered by platforms such as IG Group. Investing time and energy in mastering these key components will establish a solid base for your CFD trading adventure.

2. Choose a reliable CFD broker

So, you feel like you’ve learned everything there is to know about CFD trading? The next step is choosing a reliable CFD broker. This is an important decision to make. You need to make sure that your chosen broker is licensed and regulated to prevent falling victim to fraudulent schemes. It’s also a good idea to opt for a broker that offers a diverse range of markets and assets, such as forex, stocks, and cryptocurrencies. Don’t forget to evaluate the fees imposed by brokers and seek out those that offer educational materials tailored for beginners, including videos and articles.

IG Group is a highly recommended broker due to its risk management tools, 24-hour support, user-friendly platforms, and trading courses through IG Academy. Their competitive margins allow you to open positions for a fraction of the cost, while custom price alerts help you react quickly to breaking news. Additionally, you can gain access to 17,000 markets while freeing up your capital for other investments, as well as take advantage of both long and short trading positions in order to maximise your opportunities in the market.

3. Create a CFD trading account

Have you chosen the right CFD broker for you? It’s time to create a trading account. However, before diving into the real deal, we recommend first experimenting with a demo account. IG Group offers a risk-free demo account where you can practise using $20,000 in virtual funds to boost your confidence.

Once you’re ready, you can proceed to create your real trading account. The process with IG Group is straightforward: complete a simple form detailing your trading knowledge, undergo quick identity verification, deposit funds into your CFD account, and begin trading – with the flexibility to withdraw funds at your convenience.

4. Choose a CFD market and monitor the market

CFDs offer a wide variety of markets to choose from, you can access up to 17,000 markets with IG trading platform. These markets include shares, indices, forex pairs, cryptocurrencies, commodities, ETFs, bonds, options, and more. This diverse selection allows you to explore different sectors according to their preferences and strategies.

In addition, CFD trading can be conducted through spot markets and futures contracts. Spot trading is advantageous for short-term positions due to its real-time asset pricing nature. On the other hand, futures trading suits medium to long-term investments by enabling speculation on future price movements.

Before selecting a market to trade in, research each option thoroughly to understand its volatility levels and underlying factors that may influence price movements. Consider consulting with experienced traders or utilising technical analysis tools to make informed decisions on which CFD market aligns best with your trading style.

Remember that diversification is key when choosing multiple CFD markets across different sectors. This strategy helps spread risk and potentially optimise returns by tapping into various asset classes within the CFD market landscape.

5. Decide to go long or go short, and set your leverage

When trading CFDs, you have the option to go long (buy) or short (sell). If you anticipate a price increase, you would buy, and if you expect a decrease, you would sell.

Keep in mind that CFDs involve leverage. This allows you to have full exposure to the market with only a deposit, known as a margin. Your margin is based on the leverage ratio and acts as the initial deposit for opening a position. Trading on margin provides access to the entire trade value without requiring a large upfront investment.

For instance, if you wish to open a $1000 position on Apple shares, you would need a $200 margin (20% of the position size). It’s essential to remember that while leverage can amplify profits, it can also magnify losses since gains or losses are calculated based on the total position size. To make a profit when going long, the market price must exceed your buy price; when going short, it should drop below your sell price. The difference between an asset’s buy and sell prices is known as the spread.

The spread is determined by variations in bid and ask prices and may include additional charges imposed by us as our trading fee is above the market spread for most markets except shares where commissions are applied instead of spreads for each trade.

6. Add stop and limit orders

Before you actually place your trade, be sure to incorporate stop and limit orders into your strategy for effective risk management. A stop-loss order allows you to specify a price level at which your position will be automatically closed to prevent further losses. It can typically be triggered when the market moves against you to help minimise losses. On the other hand, a limit order enables you to set a price target at which your trade will be closed in a profitable scenario.

7. Monitor your position

After executing a trade, it’s important to monitor your position closely. With IG Group, you can track the price movements of the asset and view all your open CFD trades in real-time.

If your trade doesn’t have a predetermined expiry date, you have the flexibility to close it whenever it suits your trading strategy best. This allows you to adapt quickly to changing market conditions and capitalise on opportunities as they arise. When you feel satisfied with your profit or want to prevent further losses, you can exit your position.

Are you ready to jump into CFD trading? Try IG Group’s fast, easy-to-use web platform or download their award-winning apps optimised for all devices. With access to a wide range of financial instruments and real-time market data, you can make informed decisions and execute trades swiftly.

Sponsored by IG. CFDs are complex, high risk and losses can be substantial. 70% of retail client accounts lose money when trading CFDs with this investment provider.