What is CFD Trading? – Ultimate Guide For A Profitable Start

A CFD (Contract for Difference) is a derivative that allows traders to profit from even small price changes of underlying assets.

Underlying assets can be, for example, shares, indices, interest rates, commodities, precious metals, energy, or even crypto-currencies. The investment is not made directly in the underlyings, but only profits from rising or falling asset prices.

Profits are therefore also possible when prices are falling. The special: A so-called leverage can be used. This means that the profit is determined by a multiple of the price change of the underlying asset. If the price develops differently than expected, the stake is lost. The product therefore offers great potential, as well as a high risk.

Tips for beginners in CFD trading

CFDs have become increasingly popular with many investors in recent years. Due to the low interest rates for fixed interest investments and often quite high share prices and order fees, they are willing to take the risk in CFD trading with a small amount of savings. They thus become traders who concentrate on short-term trading in derivatives.

Traders should prepare well for their trades and prepare a trading plan. This includes first defining the goals they want to achieve with their trades. This can be a long-term increase in the capital stock earmarked for trading, trading alongside work, or a specific weekly or monthly goal. Then you should think about what suitable underlyings could be and with what number of trades or lot sizes these goals can be achieved.

Tip: If you are looking for a comprehensive trader education, you should take a closer look at this solid education. For those who have already gained initial experience but are looking for profitable signals, we recommend the PowerSignale stock round.

What makes trading with CFDs?

Profits and losses in CFD trading are basically based on the price changes of the underlying asset, for example a share.

When an investor takes a long position in CFDs on shares, he or she receives a virtual share in return for a security deposit in the amount of the current share price in cash. In the case of a re-exchange, which can take place at any time, the provider receives the share back at the then current market value, whereby the security deposit paid in the previous exchange is deducted. If the share has risen in value in the meantime, the investor makes a profit.

When entering into a short position, on the other hand, the investor delivers a virtual share at the beginning of the transaction at the current price and receives it back virtually, i.e. in cash at the price determined at the time of the redemption. A profit is therefore made if the share has fallen in the meantime.

The leverage with CFD contracts

As a rule, a security deposit is agreed at the beginning of the transaction for differences, which is much lower than the actual share value.

Example: If a share has a value of 100 € and a collateral deposit (margin) of 20 € is deposited for a long position, the leverage is 5. With a stake of 2,000 €, a “virtual” share capital of 10,000 € can therefore be “moved”.

If the share then rises by €1 to €101, this corresponds to a 1% increase in the underlying asset. However, the CFD rises from 20 € to 21 €, i.e. by a whole 5%. In CFD trading on shares, security deposits (margin) of 20 % are now mandatory. Higher leverage in CFD trading is now only possible for private traders with commodities (leverage 10) and indices (leverage 20) and in Forex trading on majorities such as EUR/USD (leverage 30).

In the case of short positions, profits with falling underlying assets arise, or more precisely from the difference in the price of the underlying asset multiplied by the leverage. If the price rises contrary to expectations, the entire investment is 100% lost.

Further examples of CFD trading with exact calculations can be found here.

Costs of CFDs

The cost of entering into CFD contracts varies between online brokers. Most providers require a spread (bid-ask spread) when depositing the margin. This means that if, for example, a long position is entered into and is then to be exchanged back because the underlying price of the underlying asset has risen, a certain threshold value must first be exceeded upwards in order to actually make a profit.

The profit is thus calculated from the price at the time of redemption minus the price at the beginning of the contract and minus the spread. The result must then be multiplied by the leverage.

With long positions, on the other hand, a certain threshold value must first be fallen below. The profit is calculated from the price at the beginning of the contract, minus the closing price and the spread, multiplied by the leverage.

Added to this is interest that is incurred for holding CFDs for a longer period of time, for example overnight or over the weekend. The reason for the interest is that by using leverage, traders are practically working with borrowed capital. After all, they move more capital than they have contributed with their collateral. Interest rates are often substantial, so positions should be closed overnight or before the weekend.

History of CFD Trading

The development of CFDs is closely linked to the British “stamp duty”, according to which for each transaction on the London Stock Exchange a levy of 0.5% was imposed on the British state, thus making share trading considerably more expensive. In the 1980s, the London branch of the Swiss investment bank USB then developed the contracts for difference.

This meant that the shares were no longer purchased directly and, above all, no longer via the stock exchange. The stamp duty could thus be avoided. In addition, an instrument was created that had long been beyond the control of the stock exchange supervisory authority. This made it possible to trade with levers and to significantly increase the risk and thus also the opportunities. For a long time, trading was only accessible between banks and perhaps one or the other wealthy private client.

Only with online brokers CFD trading became possible for a broad private audience. In the meantime, however, government regulations are also taking effect in off-exchange CFD trading via online brokers in order to better protect investors. Thus, the previously customary obligation to make additional capital contributions for private investors has now been prohibited.

Regulation in CFD trading

Unlike binary options, whose trading has now been banned by the European Securities and Markets Authority (ESMA), CFDs can be entered into without time limit.

This means that the positions can also be held overnight. However, experienced traders recommend closing CFD positions, especially on falling prices, on the same day. CFD trading for private traders is now also strongly regulated by ESMA. For example, limits on leverage have been introduced. These are for example:

  • Leverage on shares and BUND: 1:5 – this corresponds to a margin deposit of 20%.
  • Leverage on commodities: 1:20 – this corresponds to a margin deposit of 10%.
  • Leverage on precious metals: 1:20 – this corresponds to a margin deposit of 5%.
  • Leverage for main indices: 1:20 – this corresponds to a margin deposit of 5%.
  • Leverage on FX Majors: 1:30 – this corresponds to a margin deposit of 3.33
  • Leverage at FX-Minors: 1:20 – this corresponds to a margin deposit of 5%.

The security deposit to be deposited for CFD positions was set at 20% for falling prices. The German Federal Office for Financial Services Supervision (Bafin) had previously already prohibited the obligation to make additional contributions in the event of losses. This was also adopted by ESMA. Traders’ positions must therefore be closed automatically when the credit on the traders’ account is exhausted.

What should be considered when choosing an online broker?

First and foremost, traders should look for an online broker that is regulated within the EU and has a good reputation in other respects. This gives traders the security that the deposited money is deposited with European banks and is also guaranteed up to a certain amount by security institutions. A broker should also offer real-time prices and, if possible, provide a certain range of free analysis tools and indicators.

Those who are not yet very experienced in CFD trading should see that a demo account can be used to practice placing orders and get an overview of the dynamics of the markets.

The fees and minimum deposits are of course also important. From time to time, Aktienrunde.de takes a closer look at various brokers and presents the advantages and disadvantages.

Who is on the search for the best broker for the CFD trade, can inform here in detail about it and finds additionally test reports of many offerers.

Risk Management and Discipline

Only the money that could be lost in case of doubt should be used, without causing difficulties in daily life afterwards. It is important that every single trade is covered by a risk hedge, which means first and foremost that every trade is provided with a stop loss. Take-profit order supplements have also proven to be effective.

Traders must be aware that not every trade can be successful. Even professional traders make losses from time to time. It is important that in the long run more successful trades take place and that profits exceed losses.

Many newcomers make the mistake of trading with higher capital stakes or even greater leverage after losses. If the next trade then also goes wrong, they get into a downward spiral and quickly lose a lot of money.

It is therefore important to get a grip on your temperament. By setting limits for daily losses or profits together with corresponding risk limitations through stop losses and take profits, total losses can be largely avoided in a short time. The experience gained should be incorporated into the planning of the next trades, so that the stops or take profits, but also the order sizes are continually optimized.

In many cases trades are slippaged. This means that orders can only be executed with a certain time delay. Even a second delay can lead to large deviations. Here it is important to gather experience and choose a broker who places or accepts orders in the way they are intended.

Use demo account

Before using real money, it is important to ensure that the product CFDs and the markets of the underlying assets are understood. The demo account and the often offered video trainings are suitable for this purpose. For example, there are often very quiet market phases for certain assets. If, on the other hand, important news is expected, such as a balance sheet press conference or economic data being announced, prices will start to move.

Traders should therefore first observe the markets and evaluate when there could be higher volatility and momentum. With trial trades, the results achieved can be evaluated.

Focus on a few markets

If you focus on a few markets, you will quickly gain a certain expertise about the dynamics of a market. Focusing on just a few markets therefore creates greater security. After all, no one can always keep a constant eye on all markets. In CFD trading, it is often important to act quickly in order to determine a favorable entry or exit point. The use of analysis tools, pattern recognition or indicators can also prove to be very useful here.

Conclusion on CFD trading

On the one hand, trading CFDs offers high chances of profit. However, there are also great risks, up to the total loss of the money invested. Before trading with real money, traders should familiarize themselves comprehensively with the subject matter and learn to understand the product in all its facets. It is helpful to practice with a demo account and to rely on training offers to be able to trade profitably faster.

The basis for successful trading is also a reputable online broker with an EU regulation, where traders can rely on profits being paid out and orders being executed as accurately as possible with real-time prices.

Another important success factor is planned trading. With strict risk management, losses can be kept within limits. Completed trades should also be analyzed to identify potential for improvement and ultimately develop an optimal trading strategy.


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