How to trade CFDs

Here are the six steps you’ll need to follow to start CFD trading:

1. Learn how CFDs work
2. Create and fund an account
3. Build a trading plan
4. Find an opportunity
5. Choose your CFD trading platform
6. Open, monitor and close your first position

Learn how CFDs work

The first step towards trading CFDs is to learn how they work. There are a number of differences between CFDs and other forms of trading, and understanding these nuances can help you trade more effectively.

To get started, you can take a free online course through IG Academy or read our one-page introduction: what is CFD trading and how does it work?

Create and fund an account

Applying for a CFD trading account is a straightforward process, and usually takes just a few minutes to complete.

Once the details you provide have been verified, you’ll need to fund your account by a minimum amount. With IG, the minimum is £250, and you can add funds via credit or debit card, bank transfer or PayPal.

If you’d prefer to build your market confidence in a completely risk-free environment, you can open a demo account and practise with £10,000 of virtual funds.

Build a trading plan

The next step is to build a trading plan – a comprehensive blueprint for your trading activity. Among other things, this should include your motivation, time commitment, goals, attitude to risk, available capital, markets to trade and preferred strategies.

A trading plan can help you make better decisions under pressure because it defines your ideal trade, desired profit, acceptable loss, and risk management strategies.

Find an opportunity

Once you’ve opened and funded your account, it’s time to find your first trade. With IG, you’ll be able to go long and short on over 17,000 markets, including:

• Indices
• Shares
• Forex
• Commodities

With so many markets to choose from, identifying your first trade can often seem daunting. That’s why we offer a range of tools and resources to help you decide on the deal that’s right for you:

• Spot market moves at a glance with our essential charts, and interpret what they mean using our range of technical analysis tools
• Upgrade to our advanced ProRealTime charting package and gain access to automated dealing, as well as even more indicators. It’s free to use if you transact at least four times in a given month, otherwise there’s a £30 per month fee*
• Respond instantly to key market moves with alerts, which can be set to trigger when the market hits a certain level or moves by a set amount
• Learn from our team of market experts with up-to-the-minute analysis and live video, as they explore emerging patterns and trends worth watching
• Access a real-time Reuters feed in the platform, and filter the latest news stories by market, article type and more
• Be alerted to key trends and potential opportunities and explore concise, actionable analysis with third-party signals
• View our economic calendar and gain a full overview of macro and microeconomic events with the potential to move markets
• Review dedicated market data for a breakdown of trader sentiment, the latest company figures and real-time streaming prices
• Identify shares you may want to trade with the market screener, according to company fundamentals, location, sector and more

Choose your CFD trading platform

With IG, you’ll have access to several trading platforms:

• Web-based platform
• Mobile trading apps
• MetaTrader 4
• Advanced platforms

These can all be tailored to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools.

Open, monitor and close your first position

When you’ve decided which market you want to trade, you’re ready to place a deal. The first thing to decide is whether you want to go long or short. Say, for example, that you want to trade the FTSE 100. If you think its value will fall, you sell (‘go short’); if you think it will climb, you buy (‘go long’). Having the option to do either is one of the main benefits of CFD trading.

Once you’ve taken your position, your profit or loss will move in line with the underlying market price. You can monitor all your open positions on the trading platform, and close them by clicking the ‘close’ button. You can also do this manually by placing the same trade you originally placed, but in the opposite direction (unless you force open the new position). So if you opened your position by buying, you could close by selling the same number of contracts at the sell price – and vice versa.

Your profit or loss is calculated by multiplying the amount the market moved by the size of your trade in pounds per point. Here’s an illustrated example of how this works:

When placing a trade, there are a few things to keep in mind:

Buy and sell prices

You’re always offered two prices based on the value of the underlying instrument you are dealing: the buy price (the bid) and the sell price (the offer).

The price to buy will always be higher than the current underlying value and the price to sell will always be lower. The difference between the two prices is called the spread. Most CFD trades with IG are charged via the spread, with the exception of shares, which incur commission.

Number of contracts

When trading CFDs, you need to decide how many contracts you want to trade. Each market has its own minimum number of contracts: the FTSE 100’s, for instance, is one contract.

In this case, one contract is equivalent to £10 per point, but this also varies from market to market. £10 per point means you’ll make or lose £10 for every point of movement in the value of the index. We also offer mini contracts on key markets, giving you more flexibility over the sizes you trade in.

Keep in mind that as CFDs are leveraged products, you only ever need to put down a small deposit to gain exposure to the full value of the trade. This means your capital goes further, but also means that you could lose more than your initial outlay.

Stops and limits

To help restrict your potential losses, you might choose to add a stop. Stops automatically close your position when the market moves against you by a specified amount. You can choose from a number of different types of stop, including:

• Basic: Closes you out as near as possible to the price level you choose. A basic stop may be affected by ‘gapping’ overnight or in times of high volatility
• Guaranteed: Closes you out at the level you requested, regardless of whether the market gaps. This will incur a small premium, but only if the stop is triggered
• Trailing: Moves with your position when the market moves in your favour, but locks in as soon as the market starts to move against you

Limits, meanwhile, do the opposite, closing your position when the market moves a specified distance in your favour. Limits are a great way to secure profits in volatile markets.

CFD trading examples

At first glance, CFD trades can seem more confusing than traditional trades – so here are some examples to guide you through opening and closing positions.

Example: buying a share CFD

Say BT has an underlying market price of 314.6p, with a sell price of 314.5 and a buy price of 314.7. BT’s next earnings announcement is fast approaching, and you expect it to be good news. You think the company’s share price will go up, so you buy 2000 share CFDs at 314.7. This is the equivalent of buying 2000 BT shares.

Because CFD trading is a leveraged product, you don’t need to put up the full value of these shares. Instead, you only need to cover the margin, which is calculated by multiplying your exposure with the margin factor for the market you are trading.

For a position of this size on BT shares, the margin factor is 20%, so your margin would be 20% of the total exposure of your trade (2000 share CFDs x 314.7p = £6294), which is £1258.80.

Buying a share example

If your prediction is correct

When BT announces its results, it’s clear the company has had a successful quarter – and as you predicted, its share price climbs. You decide to close your position when it reaches 354.3, with a buy price of 354.4 and a sell price of 354.2.

You reverse your trade to close a position, so you sell your 2000 CFDs at a price of 354.2.

To calculate your profit, you multiply the difference between the closing price and the opening price of your position by its size. 354.2 – 314.7 = 39.5 points, which you multiply by 2000 CFDs to get a profit of £790.

Just remember that you’ll also need to pay a commission fee, any overnight funding charges, and capital gains tax on your profits.

Calculating profit from your index CFD

If your prediction is wrong

BT’s results are worse than expected, and its share price immediately falls. You decide to cut your losses and sell your 2000 CFDs at 288.7.

Your position has moved 26p against you, meaning you make a loss of £520 (in addition to your commission fee, and any overnight charges).

Calculating loss from your index CFD

Example: selling a forex CFD

Say GBP/USD has an underlying market price of 1.35550, with a sell price of 1.35540, and a buy price of 1.35560. You think the pound will lose value against the dollar because the Bank of England has decided to put interest rates down, so decide to sell five forex (FX) CFDs at 1.35540. Each contract is equal to a lot of the base currency in the pair. In this case, selling a single GBP/USD contract is equivalent to trading £100,000 for $135,540 so your total position is worth $677,700 (£500,000).

CFDs are leveraged so you don’t have to pay the full value of your position upfront. A deal of this size on GBP/USD has a margin factor of 3.33%, so your margin would be 3.33% of the total exposure of your trade, which is $22,567.41 (£16,650).

If your prediction is correct

The pound falls as you predicted. You decide to close your position when GBP/USD reaches 1.35430, with a buy price of 1.35440 and a sell price of 1.35420.

You reverse your trade to close a position, so you buy five forex CFDs at a price of 1.35440.

To calculate your profit, you multiply the difference between the closing price and the opening price of your position by its size. 1.35540 – 1.35440 = 10 points, which you multiply by five CFDs to get a profit of $500 (minus any overnight charges). Another way to think about it is that your $677,700 is now worth £500,359.17 ($677,700 / 1.35440), so your profit is £359.17 (£500,359.17 - £500,000.00).

Just remember that you’ll also need to pay any overnight funding charges and capital gains tax on your profits.

Calculating profit from your forex CFD

If your prediction is wrong

GBP/USD rises instead. You decide to cut your losses and reverse your trade when the buy price is 1.35700.

Your position has moved 16 pips against you, meaning you make a loss of $800 (in addition to any overnight charges).

Example of CFD Trade

Develop your knowledge of CFD trading with IG

Find out more about CFD trading and test yourself with IG Academy’s range of online courses.