CFD Trading

CFD trading means opening contracts for difference with a broker to speculate on prices of shares, indexes, currencies, commodities and crypto, without owning them. CFDs are widely used in the UK, Europe, Australia and many other countries, but they are not available to retail traders in the United States. They make it easy to go long or short and to trade small sizes, and they are leveraged, which is the main source of both their appeal and their risk.

How a CFD position works#

When you open a CFD, you choose a direction (buy if you expect a rise, sell if you expect a fall) and a size in units, such as shares, index points or ounces. The broker requires margin, a percentage of the position's value. Your profit or loss is the price change multiplied by your size.

Leverage limits for retail clients#

Since 2018, EU and UK regulators cap retail CFD leverage: 30:1 on major currency pairs, 20:1 on major indexes and gold, 10:1 on other commodities and minor indexes, 5:1 on individual shares and 2:1 on cryptocurrencies. Brokers must close positions when margin falls to 50% of the requirement and must ensure retail clients cannot lose more than their account balance. Clients classed as professional may get higher leverage but lose these protections. See What Is a CFD?.

Costs to watch#

For trades lasting minutes or hours, the spread dominates. For trades lasting weeks, financing can become the largest cost. See Financing and Overnight Costs.

Stop orders and guaranteed stops#

Regular stop orders can fill worse than the stop price in fast markets or gaps. Many CFD brokers offer guaranteed stops, which always close at the exact stop price for a premium. They are worth considering for positions held through events that can gap prices, such as earnings or weekends.

Choosing a CFD broker#

Because your contract is with the broker, the broker's quality matters more than with exchange traded products:

• Regulation: by a strong authority such as the UK's FCA, Australia's ASIC or an EU national regulator.
• Client money protection: segregated client funds and any compensation scheme coverage.
• Pricing and execution: typical spreads, financing rates and slippage statistics.
• Platform and tools: order types, guaranteed stops and reliable mobile apps.
• The loss disclosure: EU and UK brokers must publish the share of retail accounts that lose money; the numbers are typically well over half.

See How to Choose a Broker.

Managing CFD risk#

1. Size positions from your stop distance and risk per trade, not from the leverage available. See Position Sizing.
2. Keep effective leverage low; just because 30:1 is allowed does not mean it should be used.
3. Account for financing in longer holds.
4. Avoid holding through high impact events unless your plan accounts for gaps.
5. Keep a Trading Journal with costs included.

Frequently asked questions#

Can I trade CFDs in the United States?#

No. CFDs are not offered to US retail traders. Similar exposure is available through listed futures, options and ETFs.

Are CFDs a good idea for beginners?#

They are accessible but leveraged, and published broker figures show most retail CFD accounts lose money. Beginners should use small sizes and low effective leverage, or start with unleveraged products.

What is the difference between a CFD and a futures contract?#

Futures are standardised contracts traded on exchanges and cleared centrally. CFDs are contracts with a broker, often with no expiry, and charge overnight financing.

Sources#

• European Securities and Markets Authority, Product intervention measures on CFDs
• Wikipedia, Contract for difference