How to trade CFDs

Let’s say that you wanted to speculate on the FTSE 100 index going up, above its current price of 6900 (buy 6901.2, sell 6898.8). So, you buy 100 FTSE 100 CFDs at the buy price of 6901.2. A single FTSE 100 CFD is worth £10, so if you predict correctly and the FTSE 100 price goes up to 6911 (buy 6912.2, sell 6909.8), and you close your position by selling your CFDs at the new sell price of 6909.8, you’d have made a profit of £8600 ([6909.8 – 6901.2] x £10 x 100 CFDs).

If the index moves against you and you decide to close your position, you’d make a loss. For example, if the price drops to 6890 (buy price 6891.2, sell price 6888.8), you’d close your position by selling at the new sell price of 6888.8) In this case, you would have made a loss of £12,400 ([6901.2 – 6888.8] x £10 x 100 CFDs).

You believe the price of gold is going to rise from its current level of 1809.75. So, you buy five ‘Spot Gold Mini (10oz)’ CFDs, each with a contract size of $10 per point of movement – bringing the total to $50 per point (5 CFDs x $10 per point). As you’re buying slightly above the underlying market due to the spread, the current buy price is 1810.

Spot gold CFDs have a margin factor of 5%, so you’d need to deposit $4525 ($50 x 1810 x 5%) to open a position worth $90,500. It is important to note that because this latter amount is your total exposure, your losses could exceed your margin deposit.

The spot price of gold does increase, up to a new price of 1820.25. Consequently, you decide to close your position at the new sell price of 1820. The market moved in your favour by ten points, so you’d be taking a profit of $500 (10 points x $50) – excluding other costs.

In cases where our CFDs are denoted in US dollars, your profits or losses will be realised in dollar terms and then converted into pounds at the prevailing rate of exchange.

However, if gold had decreased in price instead, down to 1802.25, you would have made a loss. Closing your position at the new sell price of 1802, you’d have lost $400 (8 points x $50) – plus funding charges.

Assume that the GBP/USD pair is trading at 1.22485, with a buy price of 1.22490 and a sell price of 1.22480. The difference between the buy and the sell price is called the spread. Because you believe that that the pound is set to appreciate against the dollar, you buy a standard GBP/USD contract at 1.22490.

Here, buying a single standard GBP/USD CFD is the equivalent of trading £100,000 for $122,490. You decide to buy three CFDs, giving you a total position size of $367,470 (£300,000). However, because you’re trading the forex pair using leverage, your margin will be 3.33%, which is $12,236.75 (£9990). You could add a stop to your position to manage your exposure to risk.

Your prediction was right and the pound rose to 1.24100 against the US dollar. You can now reverse your trade to close your position by selling three contracts at the new ‘sell’ price of 1.24095. Your profit from this would be $4815 ($372,285 - $367,470).

1.24095 (USD sell price) x 3 (contracts) x 100,000 (lot size) – 1.22490 (USD original buy price) x 3 (contracts) x 100,000 (lot size) = $4815

If your prediction was wrong and the pound fell to 1.21490 against the US dollar (sell price of 1.21485), you’d still reverse the trade to close it, but you’d make a loss of $3015 ($364,455 - $367,470). This is because the new contract value would be lower than the initial value.

1.21485 (USD sell price) x 3 (contracts) x 100,000 (lot size) – 1.22490 (USD original buy price) x 3 (contracts) x 100,000 (lot size) = -$3015

In either case, there would be no commission to pay but you’d have to pay a funding charge to keep your position open overnight.

Learn more about trading forex CFDs