How To Trade CFDs

As mentioned on the ‘What is CFD Trading’ page, CFDs are extremely similar in format to Spread Betting, with Spread Betting more popular in the UK and CFDs being the derivative trading method of choice in much of the rest of the world.

CFD Trade Example


CFD Trade Example

CFD Trade Example

So, how exactly does one trade a CFD? Let’s take a look at an example of a CFD trade using the popularly traded DAX 30 index as an example;

In the following theoretical example, the DAX is currently trading at a level of 9610.5/9611.5, giving me the option of selling the German index at the 9610.5 level or buying at 9611.5. I decide to buy £5 of the DAX at that 9611.5 level, and my nominal risk in this instance would be worked out as follows;

(Level I’m buying at x the amount I’m buying)

So in this case the nominal risk would be;

9611.5 x 5 = 48057.5

£48,057.50 is the maximum amount of money I would stand to lose if the DAX dropped from its current 9611.5 level to zero.

CFDs and Leverage

CFDs and Leverage

CFDs and Leverage

As a form of trading involving leverage, instead of having to put down the cost of the trade in its entirety (at 9611.5 x 5 that would cost £48,057.50, the same as my nominal risk) I only need to put in a small percentage of the overall value to initiate the trade. We work this out as a percentage of the nominal risk – if the margin is 1%, then 48,057.50/100 = 480.575. Therefore, rounding upwards by a penny, £480.58 is the amount needed to initiate the trade.

If, however, I had decided to sell £5 of the DAX instead of buying it, the price of my trade would be as follows;

9610.5 x 5 = £48,052.5

The amount I would need to put into my trade would therefore be 1% of that, meaning £480.53

Traders are advised to remember that increasing leverage increases risk

CFD Trading Results

Going back to the scenario where I bought £5 rather than sold, if the DAX subsequently moves up to a level of 9613.5/9614.5 and I decide that this would be a good point for me to exit the trade, I would work out the profit on my trade as follows;

the amount I bought x the number of points that the trade has moved in my favour.

In this case my profit would therefore be 5 x 2, meaning that I would make a profit of £10 on the trade.

Alternatively, had I sold £5 of the DAX at the 9610.5 level and then closed the trade at that 9613.5/9614.5 level, my loss would be 5 x 4, seeing as the price of my closing trade would be four points higher than when I opened it. In this case, my loss on the trade would be £20.

If however, the DAX fell from 9610.5/9611.5 to 9608.5/9609.5 – had I bought £5 of the DAX at the original level my loss would be calculated as follows; the amount I bought x the number of points that the trade has moved against me.

In this instance my loss would be 5 x 3, meaning that I would make a loss of £15. On the other hand, if I had sold £5 of the DAX at the original level then my profit would be 5 x 1, giving me a profit of £5.

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