How To Become a CFD Trader

Alexandros Theophanopoulos
11 Min read

You have probably heard people talking about learning to become a CFD Trader. Becoming an experienced CFD trader will require a lot of patience and practice. In this article, we will show you how to get started and also provide a list of some of the most successful traders of all time for inspiration!

CFD Trading: An Introduction

Contracts For Difference (CFDs) are instruments which allow traders to speculate on an underlying asset, without ever actually owning the asset in question. Instead, a contract is established between the CFD trader and their broker whereby they agree to exchange the difference in value of the asset between the date of the contract opening and closing.

Simply put, CFDs provide traders with an opportunity to trade with the increase, or decrease, in the price of a financial asset. These assets can be shares, commodities, Forex currency pairs, cryptocurrencies, bonds and much more!

You may find yourself wondering exactly how CFD trading actually works in practice. The best way to illustrate this is by using a simple example.

Let's say the current price of gold is USD 1,700 per ounce and you believed that this price was about to rise. In this circumstance, you may choose to open a buy (or “long") trade with your broker using your trading platform.

If the price of gold then rose to USD 1,750 you could close your trade and make a profit of USD 50 per ounce.

If, on the other hand, the price of gold fell to USD 1,650 and you closed the trade at that point you would make a loss of USD 50 per ounce.

Admirals MetaTrader 5 with MT5-SE Add-on Gold Daily Chart (between 23 December 2015 and 12 June 2020). Accessed: 12 June 2020 at 12:32 PM GMT. Disclaimer: Graphs for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

How To Benefit When Prices Are Falling

As mentioned above, when trading CFDs it is possible to benefit even when prices are falling in a market.

Sticking to the same scenario where gold is at USD 1,700 per ounce, in a situation where you think prices will fall you would simply choose to open a sell (or “short") trade with your broker.

In this case, if the price of gold rose to USD 1,750 you would lose USD 50 per ounce but if the price fell to USD 1,650, you would make a profit of USD 50 per ounce.

CFD Trading: How To Guide

Modern technology has brought trading within reach of the general public, demystifying previously complex markets and offering flexible and accessible trading options to anyone with an internet connection.

If you are interested in becoming a CFD trader, the first thing you need to do is choose a regulated broker who offers CFD trading. Once you have chosen your broker and downloaded their trading platform, you will need to choose a trading style, pick an asset and decide whether you think that asset is going to go up or down in price.

If you are interested in starting your own trading journey, click the link below to register now for a free demo account to hone your skills in a risk free trading environment, before testing your strategies on the live markets! 

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Choose Your Style

Trading styles are defined by your time-horizons and the length of time that positions are held. Your choice of style will depend largely on your personality, your attention span and how intense you want your trading sessions to be. Typically, the shorter the time horizons for your trade, the more intensely you will need to focus during your trading sessions.

Scalping involves holding a trade for, typically, seconds - minutes at most. Day-traders tend to hold positions for minutes or hours - but never overnight.

Swing traders look for opportunities that might take several days to develop and Position traders have the longest time horizons and their trades can last for weeks, months - sometimes even years.

Scalpers and day traders may be active for just a few hours a day, looking for and executing opportunities. But during times when they have a position open they are intensely watching the markets to decide when best to close their position.

Counter-intuitively, position traders often spend the least amount of time in front of their screens. They identify trends that might take years to play out and during the times when they have an open position might just glance at their screens once a day to make sure there are no surprising news or price movements.

The style you pick will influence your choice of assets to trade.

Picking an Asset

The Forex markets are very liquid and trade 24 hours-a-day, 5 days a week and there is always something happening somewhere. As such, CFDs of currency pairs are popular with traders with a short time horizon.

Price volatility brings opportunities for Scalpers and Day Traders. Most markets increase in volatility around times of economic news - particularly if the content of the news is unexpected. If that sounds interesting, you might want to explore Admirals' Economic News Calendar to both help you choose your market and to help you find individual opportunities.

As mentioned above, CFDs are available on a huge variety of underlying assets: shares, commodities, Forex currency pairs, cryptocurrencies, bonds and much more.

The most important factor when selecting what underlying asset to trade is to pick an area you know well, or one that interests you and where you are prepared to put some work in to understand.

Are you up to date with the latest trends in technology and the companies that sell them? In this case you might try trading CFDs of individual technology companies.

Or are you more of a “macro" person who likes to read broadly about the economy and the different factors affecting it? In this case, it might be better for you to trade FX CFDs, as a country's currency tends to reflect the strength of its economy.

If you are interested in discovering the latest trading trends, refreshing your basics or get new actionable strategies, click the banner below to tune in to our free webinars:

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Buy or Sell?

Now you have picked your asset, how do you decide whether you should long or short trade the asset? It is important to do your research and plan your trade before taking a position in the market. Utilise charts to investigate the asset's recent development and identify any possible trends.

Diversify

Once you have got the hang of trading using CFDs, diversify your portfolio by trading across different markets. Any successful CFD trader will tell you that an important part of minimising risk is not exposing yourself too heavily in any one market. Instead do your research and take a position across different markets.

Top Five Most Successful Traders In the World

To provide some trading inspiration, we have compiled a list of five of the most successful traders in the world, who have generated personal wealths in the billions of US dollars!

Warren Buffet

Ranked number four in Forbes Magazine's Billionaires List 2020, Warren Buffet has an estimated personal worth of USD $67.5 billion and is considered to be the best investor in history. Known as the “Oracle of Omaha", every position taken through his investment fund Berkshire Hathaway is carefully scrutinised.

His strategy is quite simple, the billionaire invests in undervalued companies over the long term and sticks to sectors and products which he understands, steering clear of high technology and structured products.

George Soros

Hungarian George Soros is known commonly as the man who “blew up" the Bank of England. Indeed, he bet on the collapse of the sterling by short selling £10 billion, which resulted in the British currency being taken out of the European Monetary System on “Black Wednesday", 16 September 1992.

James Simons

A former university professor of mathematics, James Simons specialises in quantitative finance. Although less known to the general public than the two investors mentioned above, his investment fund, the Medallion Fund, is the best performing fund in history. Since 1988, the fund has averaged an annual return of 66.1%. His wealth is estimated by Forbes at over USD $21 billion.

John Paulson

A graduate of the prestigious Harvard University, John Paulson built his fortune by betting against (i.e., shorting) subprime mortgages - a trade from which he made, literally, billions.

Steve Cohen

A great collector of paintings, the North American Steve Cohen has amassed a fortune of nearly USD $14 billion, often by short selling stocks.

Looking for what to trade next? Why not click the banner below to discover thousands of ETFs and CFD's available, right here at your fingertips:

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Frequently Asked Questions

 

What is CFD trading?

CFD trading is a financial instrument that allows traders to speculate on the price movements of various assets, such as stocks, commodities, currencies, and indices, without owning the underlying asset. When you trade CFDs, you are essentially entering into a contract with a broker to exchange the difference in the asset's price between the opening and closing of the trade.

 

 

How do I benefit from CFD trading?

You can benefit from CFD trading by correctly predicting whether the price of the chosen asset will rise (going long) or fall (going short). If your prediction is correct, you make a profit equal to the price difference multiplied by the number of CFD contracts you hold. However, if your prediction is wrong, you will incur a loss.

 

 

What are the risks involved in CFD trading?

CFD trading carries significant risks due to the potential for both gains and losses. The leverage involved in CFDs can amplify your profits, but it can also magnify your losses. It's important to be aware of the risks, use risk management strategies like setting stop-loss orders, and only trade with money you can afford to lose. Additionally, CFDs are complex financial instruments, so it's crucial to understand how they work and be aware of the associated costs, such as spreads and overnight financing charges. Consider seeking advice or educating yourself thoroughly before engaging in CFD trading.

 

INFORMATION ABOUT ANALYTICAL MATERIALS:

The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admiral Markets investment firms operating under the Admiral Markets and Admirals trademarks (hereinafter “Admirals”). Before making any investment decisions please pay close attention to the following:
1. This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
2. Any investment decision is made by each client alone whereas Admirals shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content.
3. With view to protecting the interests of our clients and the objectivity of the Analysis, Admirals has established relevant internal procedures for prevention and management of conflicts of interest.
4. The Analysis is prepared by an independent analyst (hereinafter “Author”) based on the NAME +(Position) personal estimations.
5. Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admirals does not guarantee the accuracy or completeness of any information contained within the Analysis.
6. Any kind of past or modeled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admirals for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
7. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.

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