How CFD Trading Works

Let’s go through an example CFD trade, to see in general how CFDs work.

This is an illustration only and may be different between various brokers or providers. It is just to see an example.

Let’s say that we have a leveraged up value of $100 000.

The cash float required to trade this leverage amount, depending on how much leverage you use, could be less than $100 000. If the provider allows 2 to 1 leverage, then the amount required is $50 000, if 5 to 1 leverage then it is $20 000, and so on.

Table of Contents:

Page 1 - CFD Tutorial - example trade
Page 2 - CFD Position Sizing - calculating size
Page 3 - Using CFD Leverage - why or why not?
Page 4 - CFD Trading Systems - what types are there?
Page 5 - Trading CFDs Versus Stocks - what's the advantage?
Page 6 - CFD Order Types - what types you may use
Page 7 - CFD Trading Tips

Note that leverage multiplies your trading results. So using high leverage can increase both gains and losses in a trading system, and thus should be used with responsibility and care.

And let’s say that in this example the position is $10 000 in value. This is an example for illustration purposes only, and this money management model may not be suitable for you or your system.

Let’s say that you bought some CFDs when its price was $5.70.

With a trade size of $10 000, this means that the number of CFDs bought would have been 1754, that is 10 000/5.70 = 1754.

Note: this trade size is purely hypothetical and is not a recommendation of how to perform money management, or a part of any recommended system, and is for illustration purposes only.

And let’s say that our stop loss was set at $5.50, which means that if the price falls to or below $5.50, then we would exit this trade at a loss.

Let’s assume the CFD price is now $5.90. And let’s say that we have a railing stop. A trailing stop is a stop that moves in the direction of our trade (up for long positions) as the trade goes in our direction.

The CFD price goes up to $6.32, and our trailing stop is moved up to say $6.20, purely as an example. Then finally the CFD price falls, and in fact falls through the stop loss of $6.20, thus exiting us at $6.20.

The whole trade took 14 days.

The difference in the price from entry to exit = $6.20 - $5.70, which comes to $0.50.

Thus our gross profit = (difference between entry and exit price) x (number of CFDs)
= $0.50 x 1754
= $877.

So we've calculated our gross profit. Let’s now calculate our costs, to work out the net profit.

Our costs = commission + interest. Let's calculate each in turn:

1. Let’s assume our CFD provider’s commissions are $15 in and $15 out, or 0.15% of the trade size, whichever is greater. In this case, our commission would be:

Commission = $15 + $15 = $30

2. And let’s also assume that our provider’s interest rate charge for long positions held overnight is 7.5% or 0.075 per annum. To calculate how much this is for our trade, we need to make it “pro rata” (times it by the days in trade, then divide by 365), and then multiply it by the trade size.

Interest = (interest rate for long position) x (days in trade/365) x (trade size).
= 0.075 x 14/365 x 10000
= $28.76

Thus our net profit = gross profit - (commission + interest)
= $877 – (30 + 28.76)
= $818.24

Not that the above is a hypothetical trade and is not taken from any particular system, and does not imply that this is a typical profit. Remember that losses can occur.

Note here, that for short positions, interest costs are paid to you, not charged, so will offset rather than contribute to the costs. Also note that the exact figure for the interest payment is a bit more complex that the above example, as the interest is calculated daily from the value of the trade size at market value, rather than from the value of the trade size when entering or exiting the position. If we calculated the interest cost using the final position size of 10818.24, the interest would be $31.28, which is very similar. So the real interest cost would be between $28 and $31.

So that’s how a CFD trade is done. You have seen how transaction costs are calculated for a CFD trade.

Note that the above example assumes no slippage, which means that you enter and exited at the intended price.

It is possible to for example exit at a price that is different to the intended price due to gapping or liquidity issues. For example, if your stop loss is at a certain price but the stock opens below that price, or trades at inadequate volume at the price, then your exit price may be lower than that intended.

This can occur at times and is known as slippage.

Find out more in part 2 on this CFD tutorial: CFD Position Sizing.

Note:

All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. Seek your own financial advice before taking any action.

All forms of trading involves risk of financial loss.

Also note that CFD trading is not legally permitted in some countries.

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