How to trade CFDs

Interested in CFD trading? Follow this step-by-step guide and get started today. Learn what contracts for difference (CFDs) are, how to trade CFDs and more.

How to place a CFD order

To place a CFD trade, you first need to understand how contracts for difference work. Then, you can choose whether to go long or short and open your position by selecting your chosen number of contracts. You’ll realise any profits or losses when you close the position.

CFDs are sophisticated tools, enabling you to speculate on both rising or falling markets, use leverage and access thousands of instruments – 24 hours a day. But to take full advantage of the versatility of CFDs, you’ll want to ensure you understand how to trade them correctly.

Follow these eight steps to open your first CFD position today.

CFD trading steps

  1. Learn how CFD trading works
    Understand the basics behind contracts for difference, and how they differ to other financial products

  2. Open a CFD trading account
    Get started with a demo account, or go straight to live markets 

  3. Choose a CFD market
    Decide which market you want to trade. Looking for inspiration? Head over to our research portal

  4. Decide to buy or sell
    Click 'buy' if you think your market will increase in value, or 'sell' if you think it will fall

  5. Select your trade size
    Choose how many CFDs to buy or sell

  6. Add a stop loss order
    A stop loss is an order to close your position out at a certain price if it moves too far against you, and a useful way of limiting your risk

  7. Execute your trade
    Hit ‘place trade’ to open your position

  8. Monitor and close your trade
    Now your position is open, you will see your profit/loss update in real time. You can exit it by clicking the close trade button

Let’s take a closer look at each step.

1. CFD trading explained: What is CFD trading?

CFD trading is the buying and selling of contracts for difference, financial derivatives which enable you to go long and short on a huge range of financial assets – such as shares, indices or forex pairs.

Unlike traditional investing, you never own the stock or currency you’re trading.

For example, if you want to go long on oil, you could buy an oil CFD that makes or loses you $1 for every point oil moves. You won’t take ownership of any oil, but you’ll still earn a profit or a loss from its price movement.

If oil rises 100 points, you earn $100 as profit. If it falls 100 points, you lose $100.

This is a simple example, but there’s a lot more you should understand about CFDs – including leverage, shorting and more. We’ll cover these below, or for a complete explanation, take a look at our full guide to how CFDs work.

2. Opening a CFD trading account

To buy and sell CFDs, you’ll need an account. This is what you’ll use to research new opportunities, open and close positions, manage your risk, monitor your P/L and more.

Before you commit real capital, you can open a demo CFD trading account to try things out with zero risk. A City Index demo, for example, gives you $20,000 virtual funds to buy and sell our full range of markets. All the price movements are real, the only part that isn’t is the money involved. So it’s a great place to practise.

Learn more about City Index’s demo account.

When you’re ready to risk some real capital, you can open a live account, which usually takes minutes (application subject to review and approval). Then, once you’ve added some funds, you’ll be all set to get started.

3. Choosing a CFD market

One major advantage of CFDs is the huge range of markets you can choose from.

At City Index, we offer contracts on over 6,300 individual markets across shares, indices, currencies, commodities, interest rates, bonds and more. From a single platform, you can access major global markets in the UK, US, Europe, Asia, Australia and New Zealand.

With so much choice, it’s important to find an opportunity that suits you. There are lots of research tools available in our platform to help you do just that – including news and analysis pieces, technical indicators, alerts and more.

Once you’ve chosen a market, use the search function on the platform or app to find it. You’ll be able to see its live price, view a chart and take a look at all the information you need to know before taking your position.

4. CFDs: buy (go long) vs sell (go short)

CFD markets have two prices. The first is the sell price (the bid), and the second price is the buy price (the offer). The difference between the two is known as the spread.

Both are based on the price of the underlying instrument. The sell price is always lower than the market price, while the buy is higher.

Before you open your position, you’ll need to decide whether you want to buy or sell. If you believe your market will go up, you go long by trading at the buy price. If you believe it will fall, you can short it by trading at the sell price.

Shorting a market means you earn a profit if it falls in value, and a loss if it rises. Find out more about shorting.

5. Select how many CFDs to trade

You’ve chosen your market and decided whether to go long or short. But how do you select the size of your position? With CFD trading, you select the number of contracts to buy or sell.

Each contract represents a certain amount of its underlying asset. With stocks, one CFD is equivalent to one share. With FX, you will be trading per pip, therefore if you buy at 1.4305 and sell at 1.4306, you will make one times the pip value of the trade. To see what a contract means for your market, look up the 'tick value' in the instrument's market information sheets.

CFDs are bought and sold in the base currency of the underlying market. So, if you’re buying a US share CFD, then your profit or loss will be calculated in US dollars.

How much margin?

Contracts for differences utilise leverage, which means you only need to have a small percentage of the overall trade value, known as margin, in your account to open a position. The larger the value of your trade, the more margin required.

It is important that you have enough funds in your account to cover your margin. The dealing ticket in the trading platform will automatically calculate how much margin you'll need to open a position.  

6. Add stop and limit orders

Before you place your trade, you’ll want to consider your risk-management strategy.

A key risk-management technique is to place an order, such as a stop loss, that will automatically close the trade if the market reaches a certain level.

A stop-loss order is an instruction that tells your provider to close your position once it reaches a specific level set by you. This will, as the name suggests, be at a worse price than the current market level and can typically be triggered on losing positions to help minimise losses.

Stop loss example

A limit order, meanwhile, is an instruction to close out a trade at a price that is better than the current market level and is typically used to help lock in profits.

Limit order example

Standard stop losses and limit orders are free to use and can be placed in the dealing ticket when you first place your trade, or once it is open.

Once you’ve set up your risk management, you can execute by hitting ‘Place Trade’.

7. Monitor your CFD trade

Now your position is live, your profit and loss will move as the underlying market goes up and down.

You can track market prices; see your profit/loss update in real time and edit, add to or exit your position from your computer, or by using our mobile app.

If you didn’t select a stop or limit before opening the position, then it isn’t too late – you can add them now. If you already have exit orders in place, meanwhile, you can move them to reflect changing conditions.

8. Closing your trade

To close a CFD, you need to trade in the opposite direction from where you opened it. If you bought 500 CFDs at the outset, then you can sell 500 CFDs now to close. If you sold 500 CFDs to open, you buy 500 CFDs to close.

Alternatively, you can select the 'close position' option within the positions window.

Your net open profit and loss will now be realised and immediately reflected in your account cash balance.

To calculate your profit or loss manually, just subtract the opening price from the closing price (or the opposite for short positions), then multiply that figure by the size of your position. Just remember to take any costs into account.

Managing risk in CFD trading

Like any form of trading, CFDs involve risk. Prudent traders invest time into mitigating this using the variety of risk management tools they have at their disposal.

One of the key risk management tools available are guaranteed stop loss orders (GSLO). These work just like the standard stops we cover above, but unlike standard stops they can’t be affected by slippage, which can mean that your trade closes at a worse level than where you set your order.

Learn about the other risk management tools you can use, or take a look at our guide to mitigating the risks of CFD trading.

Hedging with CFDs

Hedging is a trading tactic that is often deployed in order to reduce the risks within trading. Typically, hedging is practised by placing trade(s) that will offset the potential losses or negative balance of a trade that is already open.

An example of this would be if you had an existing trade open on a specific instrument that is currently trading negatively, you may wish to place an additional trade in the opposite direction to level out your balance. Whist this practice cannot completely remove risk and/or losses, when used correctly, it can reduce them.

CFD trading example

  1. You open a new City Index account and deposit $2000
  2. After doing some research, you decide to trade the Australia 200 
  3. You believe that the Australia 200 will fall, so you plan to sell the market at 7540
  4. You sell two Australia 200 CFDs, which means you earn $2 for each point of downward movement, and lose $2 for every upward point
  5. You set a stop at 7550, which will close your position if it hits a loss of $20
  6. The Australia 200 falls and you close at 7500. 7540-7500 is 40 points, so you make $80

However, if the Australia 200 had risen instead, you would have made a loss. For more in-depth examples of how CFD trading works, take a look at our CFD examples page. 

CFD trading FAQs

What’s the best CFD trading platform?

Every trader has their own opinion on which platform is best – it all depends on what your specific requirements are. It’s often a good idea to try out a few different options to see what works for you.

What’s the difference between CFDs and investing?

Contracts for difference and investing both enable you to take positions on financial markets, but they work in different ways. When you invest, you are typically buying and holding a market in the hope that it rises in value so you can sell it for profit. With CFDs, you never own the asset – you’re just speculating on its price movements.

CFDs bring several benefits over investing. You can trade on margin, short markets and more.

Learn more about CFDs vs investing.

What is a CFD account?

A City Index CFD account is what you’ll use to buy and sell contracts for difference, giving you access to your trading platform, fund management and more. Most CFD trading accounts enable you to speculate on a huge range of financial markets, including shares, indices, forex and commodities.

What are the advantages of CFDs?

Three of the main benefits of CFD trading are the ability to go long or short aby instrument, allowing you to profit in either direction; the ability to hedge your trading; and the use of margin, which means you can open trades for a fraction of their value.

Which instruments can I trade?

You can trade over 6,300 financial instruments using CFDs including shares, forex, commodities and indices. We also offer further information and educational materials on CFDs including the markets available and the benefits of trading them.

Is CFD trading right for me?

Before you start CFD trading, you should familiarise yourself with the risks and benefits. City Index provides a comprehensive collection of educational resources to all traders including information on the costs of CFD trading to help you make an informed decision.

What is the difference between CFDs and futures?

While they are both derivatives – financial products that enable you to speculate on markets without buying assets – and both take the form of a contract, CFDs and futures work very differently in practice.

When you buy a future, you are agreeing to trade a set amount of an asset at a set price on a set date (known as the expiry). If you hold a future when it expires, you’ll have to either buy or sell the underlying market – whether its oil, gold, forex or shares.

With a CFD, you are agreeing to exchange the difference in an asset’s price from when you opened your position to when you close it. You’ll never have to take ownership of the asset itself.

Does a CFD expire?

Daily CFDs do not have expiry dates, but they are subject to costs including overnight financing charges. Forward CFDs do expire at a future date and their financing costs are included within their spread.