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 trade

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.

But to take full advantage of the versatility of CFDs, you’ll want to ensure you understand how to trade them correctly.  

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

CFD trading steps

Let’s take a closer look at each step.

1. CFD trading explained

CFD trading is the buying and selling of contracts for difference, financial derivatives in which you agree to exchange the difference between the opening and closing price of a specific financial asset – such as a share, index or forex pair.

Unlike traditional investing, you don’t take delivery of the asset. 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 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 £10,000 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. 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 1,000s of individual markets across shares, indices, currencies, commodities, interest rates, bonds and more. From a single platform, you can access major global markets. 

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. Decide to buy contracts (go long) or 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 slightly lower than the market price, while the buy is slightly 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 tick, therefore if you buy at 1.4305 and sell at 1.4306 you will make one times your stake. 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, then your profit or loss will be calculated in 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 margin calculator in the trading platform will automatically calculate how much 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.

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.

Closing your trade

To close a CFD, you need to trade in the opposite direction to when you opened it. If you bought 500 CFDs at the outset, then you sell 500 CFDs now. If you sold 30 contracts to open, you buy 30 contracts 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.

CFD example

  1. You open a new City Index account and deposit £2,000
  2. After doing some research, you decide to trade the UK 100
  3. You believe that the FTSE 100 will fall, so you plan to sell the market at 7,640
  4. You sell two UK 100 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 7,650, which will close your position if it hits a loss of £20
  6. The FTSE falls and you close at 7,600. 7,640-7,600 is 40 points, so you make £80

However, if the FTSE 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. 

How to trade CFDs FAQ

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.

With a City Index account, you get access to our web trading platform, apps for Android and iPhone, TradingView, and MetaTrader 4.

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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.

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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 and commodities.

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If you have more questions visit the FAQ section or start a chat with our support.