How to Trade CFDs

Spread Betting is more widely used in the UK and Ireland, but as it’s not authorised outside of these countries, CFD trading tends to be the favoured derivative trading method for most of the rest of the world.

CFD Trade Example

CFD_Trading

CFD Trade Example

CFD Trade Example

The following example of a CFD trade will demonstrate how this sort of trade works. Imagine that the DAX 30 index is trading at 9620.5/9621.5, which gives us the ability to buy at 9621.5 or sell at 9620.5.

We buy £5 at 9621.5, which makes my nominal risk as follows:

Level we’ve bought at (9621.5) x the amount we’ve bought (5) = 48107.5

So this means that if the DAX dropped from 9621.5 to a level of 0, the maximum that we’d lose is £48,107.50

CFDS AND LEVERAGE

CFDs and Leverage

CFDs and Leverage

Because CFD trading allows us to employ leverage, we do not have to put down the full cost of the trade (9621.5 x 5 = £48,107.50). Instead we are able to merely put down a small percentage of the total cost to place the trade. This is calculated as a percentage of the potential risk, so were the margin to be 1%, then 48,107.50/100 = 481.075. This would be rounded up to £480.08, which would be the amount we’d need to initiate the trade.

Alternatively, if we sold £5 of the DAX rather than buying, the price of the trade would be calculated as follows:

Level we’ve sold at (9620.5) x the amount we’ve sold (5) = £48,102.50

Using leverage, the amount we would need to cover this trade is 1% of the figure, which would equate to £481.03.

While using leverage allows the trader to potentially make a large profit from a modest investment, increasing leverage also increases the level of risk.

 

CFD TRADING RESULTS

CFD Trading Results

CFD Trading Results

If we return to our example of buying £5, if the DAX increases to 9623.5/9624.5 and we decide that this is a good point to exit the trade, our profit would be thus:

The amount we bought (5) x the points increase (2) = £10

Returning to our other example, where we sold £5 of the DAX at 9620.5, if we closed the trade at the lower level of 9615.5/9616.5,

our loss would be calculated like this:

The amount we sold (5) x the point decrease (4) = £20

Had however the DAX fallen, from a level of 9620.5/9621.5 to 9618.5/9619.5, we would make a loss on the trade where we bought:

The amount we bought (5) x the point decrease (3) = £15

In the example where we sold, a profit would be made:

The amount we sold (5) x the point increase (1) = £5

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