Learn CFD Trading: What are CFDs and CFD trading, and what are the best strategies?

Mark Norgate
October 3, 2021
learn-cfd-trading

CFD trading is a real alternative for the personal portfolio for more and more investors. Theoretically, even small investors can use leverage to invest large sums of money. However, it is important to be fully informed about CFD trading.

After all, trading in them is hazardous. Those who are well versed significantly increase their chances of making high profits by trading.

This guide clarifies what CFD trading is, what strategies there are, and what should be considered for tremendous possible success. So even beginners should be able to learn CFD trading quickly.

Table of Contents

What is CFD trading? CFD Meaning & Definition:

CFD stands for ” contracts for difference “, but the abbreviation CFD is even more common.

Company shares are not acquired when trading a CFD. However, the price is derived from these underlying values. The base value can be a share, but also an index or a cryptocurrency, for example.

With a CFD, you only speculate on the difference in a base value instead of owning the base value. A wide variety of underlying can also be traded with leverage to achieve large profits and the total loss through so-called margin calls.

CFDs are considered highly speculative financial derivatives. Accordingly, investors should be aware of this risk and not act gullibly or without a background in large amounts.

“Risk-minded investors can achieve high profits within a very short time through CFD trading. In addition, you can speculate on underlyings that are not tradable for conventional investors. However, we recommend optimal preparation and the choice of a suitable online broker. Beginners can also benefit from the wealth of experience of successful traders. “

The idea of ​​this type of trading was born in England and went back to the investment bankers Brian Keelan and Jon Wood. However, CFD trading has only been possible for private individuals since the 1990s; institutional traders, particularly, used this option until then.

Beginners are often put off by technical terms

Those who have not been involved with finance and investment topics for a long time often do not yet have the necessary prior knowledge. As a result, terms like CFD broker, day trading, real-time trading, CFDs or contracts for difference often cause unsuspecting shrugs. However, if you take the trouble to find out more, you can quickly see that behind complicated terms, there is often a structure that is not that complicated.

The idea behind CFD trading is as follows: Investors should speculate on price changes in investment forms such as stocks and indices without buying the security. These investors can either speculate on a rising or falling price.

The CFD broker, in turn, pays the investor the difference, which is why the term contract for difference is also used. With such an investment, investors have the chance to achieve high profits even with small amounts. This is because trading takes place via the CFD broker and the trader, not via exchanges.

learn-cfd-trading

Learn to trade CFD: Wiki

The information in this chapter serves, to expand the level of knowledge through important CFD trading facts. It also recalls what has already been learned.

CFD trading

Over-the-counter trading using a CFD broker. Users do not buy stocks, currencies, etc., but speculate on their rise or fall.

Contract for difference

Form of investment in which large sums can be traded with little capital. You buy positions using CFDs without owning them in real terms. The profit/loss is made up of the price difference.

Amount of capital in CFD trading

The CFD brokers usually only require a minimum deposit of a few hundred euros. Even with just a few cents, you can then trade after the deposit, and, thanks to the lever function, larger sums can still be moved.

Who invented it – and why?

CFDs were invented and developed in London, mainly because it was a way to get around the financial tax as trading takes place over the counter. Later on, CFD trading was expanded, especially to ensure small private investors access to the financial market.

What is leverage in CFD trading?

High leverage is very attractive to many investors. However, it should be noted that the lever can always work in both directions. Both high profits and high losses are possible. The higher the leverage, the stronger the effects of the price changes.

Example: You invest 1000 euros in Apple with a leverage of 5. This leverage of 5 means that a positive fluctuation of 20 per cent in the base value doubles the capital employed.

On the other hand, if App underlying’s share price falls by 20 per cent, all of the capital invested is lost. Leverage of 1.50, means a market change in the position of 1 per cent leads to a change of 1.5 per cent in the portfolio.

The best CFD broker accounts in comparison in 2021:

Rating

Min. Deposit

Min. Spread

Assets

Views

Positive Reviews

Negative Reviews

Likes

4.9/5
250
0.07
  • Commodities
  • Forex 40 +
  • Metals
  • Stocks
  • Indices
  • Cryptocurrencies
85
2
4.5/5
250
0.07
  • Metals
  • Forex
  • Indices
  • Cryptocurrencies
  • Commodities
  • Stocks

 

254
82
3
58
4.9/5
250
0.07
  • Forex 40+
  • Metals
  • Commodities
  • Stocks
  • Indices
  • Cryptocurrencies

 

480
80
3
50
Registration with a CFD broker & CFD trading explained: Our step by step guide

etfinance

1. Registration with our test winner ETFinance

Registering with ETFinance is very easy: Go to the official website of ETFinance and enter your username, email and password in the registration form.

You will then receive a confirmation email from ETFinance, which you must confirm via the verification link.

2. First deposit at ETFinance

After registering, you need to decide how much money you want to deposit with ETFinance. The minimum deposit is € 250.

Once you’ve decided on an amount, you’ll need to click the ” Add Money ” button after registering with ETFinance.

Now you can choose between different deposit methods, including PayPal, credit card or bank transfer.

Here is an overview of all payment methods available at ETFinance:

Payment optionPossible?
CFD trading with credit card✔️
CFD trading with PayPal✔️
CFD trading with Skrill✔️
CFD trading by bank transfer✔️
CFD trading with Neteller✔️
CFD trading with UnionPay✔️

3. CFD trading with ETFinance

After the deposit, the money will appear in your account under the menu item ” Account “.

First, find the trading pair you want using the search bar above and click the “ Trade ” button.

A small window will open (see screenshot) where you can set the price and the number of stock CFDs you want to trade. You can also set stop-loss and take-profit, i.e. at which price the share should be sold again in the event of a profit or loss. The two fields are optional.

The Leverage field allows you to control whether you want to buy the real share (x1 leverage) or a CFD (x2 or more leverage).

With a click on ” Place order ” the purchase is completed, and the share CFDs appear in your portfolio.

What is the best CFD trading app?

Our test winner in terms of CFD trading is ETFinance, which also offers the best CFD trading app. This is mainly because the trading of stocks and ETFs is completely free of charge. This means 0% fees on trading stocks & Co. In addition, there are only very low spreads.

In addition, ETFinance is fully regulated and licensed. The CFD trading app from ETFinance is self-explanatory and modern, making it easy for users to operate the broker. So you can keep an eye on your portfolio from anywhere and at any time and trade CFDs.

Another main focus of ETFinance is social trading. So you can copy portfolios of other traders easily and quickly – quite legitimately. This is why ETFinance is also known as a social trading platform.

Furthermore, the CFD broker offers a large selection of trading options: stocks, CFDs, ETFs, raw materials, cryptocurrency and much more are on offer. So there should be something for every investor.

With the help of the demo version (which is also available on the app), the blog and social trading, even beginners can develop and expand their knowledge of trading.

Learn CFD trading: what strategies are there?

There is no such thing as one successful CFD trading strategy, but a multitude of them. Which an investor decides on is not least also individual and depends on personal preferences. However, suppose CFD trading is to be successful. In that case, it is vital to have a strategy – those who start trading without thinking about it will only be successful in the very rarest of cases.

To test the selected CFD trading strategy, we recommend that you first try it out with a demo account of the selected CFD broker. Thus, the motto is First CFD training, then trading!

In a broad sense, two main strategies can be distinguished: short-term and long-term transactions. With a short-term CFD trading strategy, the contracts are bought and sold on the same day or within a few days.

The term CFD day trading and real-time trading has also established itself for this. A long-term CFD strategy is characterized by the fact that – as the term suggests – the investor does not intend to sell the purchased position again shortly.

  • Activate stop-loss order: Loss limitation is an important CFD strategy. This stop-loss order is used to determine the price below the current price at which a position should be sold. This can protect against high losses. If you want to make successful CFD online investments, you shouldn’t do without this important function.
  • Knowledge is power: Investors should be equally informed about opportunities and risks. An efficient strategy is extremely important. However, this can only be successfully implemented if the background knowledge is available. What is CFD trading? Which CFD trading software is perfect for your individual needs? What’s the Difference in Forex CFD? What is Real-Time Trading? Which CFD strategy should be used? If you can’t answer these questions off the cuff, you should dig deeper into the matter before finally trading in real money.
  • Avoid very high leverage: Many investors, especially beginners, use excessive leverage. These are tempting, and undoubtedly there is a chance of making very high profits with them. However, this CFD strategy is hazardous, especially in the long term. Inexperienced people, in particular, can easily burn their fingers. With lower leverage, you are on the safer side when learning CFD trading.

Day trading

Day trading refers to the buying and selling various assets, provided that the positions are closed on the same day. In order to be successful as a day trader, it is essential to be well informed about the market.

A significant advantage of day trading is that there are no so-called swap costs – these only have to be paid if a position is held overnight and the sale is not made on the same day. How high these swap costs are can be found in the respective CFD software.

However, the positions are held a little longer in some cases, but usually not for more than a few days.

Day trading is a very lucrative but also risky business. Wealth can be generated within a short time, but the opposite is also possible. However, experienced day traders have sufficient knowledge of the market situation and will usually use different strategies to reduce overall risk.

Day traders usually trade with stocks, with an index or with conventional currencies and cryptocurrencies. Day traders aim to benefit from short-term fluctuations.

Real time trading

With the help of good trading software, investors can follow price fluctuations in real time. Without this immediate real-time transmission, successful short-term trading is hardly possible. Real-time trading is fundamentally different from conventional investments.

Investments are usually only referred to if a long-term trading position is sought, with a holding period of six months or more. On the other hand, Real-time trading is much more short-term. Often the holding period is only a few seconds or minutes.

What are the characteristics of good CFD trading software?

Good CFD software has to meet several criteria.

First, it is essential for successful CFD trading that price fluctuations can be followed in real-time.

Otherwise, real-time trading or day trading cannot be carried out successfully.

Optimal CFD software allows this and at the same time offers other analysis and trading tools.

In addition, an optimal CFD trading software distinguishes that it is possible to create trading plans.

  • Connection of the trading software to good brokers with favourable conditions and a good price/performance ratio.
  • Reliable real-time data: Long-term investments can easily be traded with a delay. In the vast majority of cases, this should not lead to any negative aspects. However, real-time prices are necessary for day trading or real-time trading.
  • Newsticker with real-time news, as world politics can significantly impact the prices of raw materials, currencies, etc.
  • Possibilities for technical analysis to be able to interpret the course better. Ideally, the optimal graphic representation of the diagrams.

learn-cfd-trading

What are the perfect conditions for maximum success in CFD trading?

As with most things in life, you have to pay a bit of the hardship here. Sooner or later, however, CFD traders and especially day traders should meet the following requirements: time and discipline, specialist knowledge of the stock market, a good CFD trading strategy and sufficient capital.

Learn CFD trading: what are CFDs? What types of CFD investments are there? (Stocks, forex & cryptocurrencies)

CFDs are contracts for difference. CFD is an abbreviation and means, in full, Contracts for Difference. These are so-called derivatives, i.e. papers whose performance depends on the development of the underlying assets. A base value can be, for example, a cryptocurrency, a share or an index.

CFDs are becoming increasingly popular. This also enables small investors to move large sums of money on the market. Moreover, because the trader does not own the product himself but only speculates on its performance, he saves costs: As a rule, there are no account management fees and no commissions or similar costs.

From a tax point of view, profits are valued differently than profits from regular stock exchange trading.

Difference Forex CFD

After showing what CFDs are, here is a brief explanation of the difference to Forex CFDs. For this, it is necessary to explain what this is all about. Forex trading means buying one currency and selling another currency at the same time.

The forex market is anything but small. The daily turnover is very high, it is considered one of the largest and most liquid financial markets. Investors can benefit from the fluctuations in the exchange rate of numerous currencies. These trades are always made in pairs:

For example, US dollars/euros. In Forex trading, levers are also used, with the help of which large sums can be moved, although only a tiny. It is part of these sums that have been deposited in the CFD account.

The common feature between Forex products and CFDs is the lever function. CFD trading, however, relies on the price development of an underlying asset, while Forex trading is about comparing two currencies.

Advantages of CFD online trading

There are several advantages to CFD online trading, so this form of investment is becoming increasingly popular. On the positive side, trading CFDs requires little equity.

In addition, the transaction costs for this type of trading are meagre.

For many other financial instruments and forms of investment, the fees are much higher. Another advantage of CFD online trading is that trading is possible around the clock, as the CFDs are not traded on the exchanges and are therefore not tied to their times.

Many different underlying assets can be traded with CFDs. As a result, investors can make very individual trading decisions depending on their interests, experience, and knowledge of the respective market characteristics. For example, in CFD online trading, you can speculate on underlying values ​​such as stocks, cryptocurrencies, commodities, etc.

CFD Trading Fees (Spreads) Comparison: What is the Cheapest CFD Broker?

So we compare the fees of the largest brokers with the following example:

  • Purchase of Apple Stock CFDs worth € 1,000
  • Hold the Apple Stock CFDs for one month and then sell them
  • No course changes in the 30 days

With these assumptions, we now compare the fees of Libertex, ETFinance & Plus500 :

providersLibertexETFinancePlus500
Depositfor freefreefor free
Purchase fees€ 2.20free€ 2.54
Holding feesfor freefreefor free
Sales charges€ 2.20spreads€ 2.54
Total fees€ 4.40Reasonable€ 5.08

Are there any investment alternatives to CFD trading?

In addition to CFD trading, there are a number of other forms of investment. We recommend using these options. Those who diversify optimally reduce the risk. If losses are emerging in one form of investment, this can be cushioned by another.

With a good online broker, it is possible to trade with various types of investment. Therefore, we definitely recommend making an online broker comparison.

The portfolio must, of course, not only be equipped with CFDs. Particularly sought-after investment alternatives include share trading, trading in cryptocurrencies, forex trading and buying government bonds. Different strategies can be used for these types of investments.

Investors should never act mindlessly but rather be clear about their goals: For example, is there a short-term profit intention, or is it a long-term investment? Is there a likelihood that the capital will need to be accessed soon?

Are you willing to take high risks? Or is a conservative form of investment more desirable? Other aspects could be added to this short checklist.

learn-cfd-trading

Plan ahead

In any case, it is important to think about it beforehand. Depending on the type of investment and strategy, specific factors need to be taken into account. With a good online broker, it is possible to use different offers. Moreover, more and more investors want to buy shares with the app – successful trading is probably more accessible than ever today.

With the online broker, the account of your choice can be created and verified within a few clicks and minutes. Top-rated online brokers are also social trading platforms. Thanks to social trading, even relatively inexperienced investors can make high profits by relying on the knowledge and experience of a social trader and copying his investments.

If you are interested in a Bitcoin investment, you can benefit from our Bitcoin Buying Guide here.

 

CFD Trading Conclusion: Our experience with CFD trading

CFD trading is a popular way to speculate on different underlying assets with small sums without purchasing them. Trading takes place over the counter. Because of the lever function, high profits are possible. At the same time, this feature also increases the risk for investors.

There are different CFD brokers. If you want to learn CFD trading, you should deal carefully with the various options. A comparison is always worthwhile. The CFD trading software should meet specific criteria and provide tools.

Many users use CFD trading for so-called day trading and real-time trading. You usually buy and sell the positions within the same day. Short-term exchange rate fluctuations can sometimes result in high profits. However, the investment form is considered highly speculative.

How successful a CFD trader depends mainly on their own experience and willingness to learn about market events, CFDs in general, and different CFD brokers.

4.9
4.9/5

Our recommendation: Trading at Investby

Our recommendation: Trading at Investby

  • The broker provides an Islamic Account
  • It provides a dedicated account manager
  • Receive customised investment news
  • Trade with a variety of assets
  • There’s no deposit limit
ABinvesting Review
4.5
4.5/5

Our recommendation: Trading at ABInvesting

  • Acknowledge the financial markets through education material 
  • Free VPS is available 
  • Get a swap discount of 50 per cent 
  • Islamic Account is available to traders 
  • Select account types of your interest
4.9
4.9/5

Our recommendation: Trading at PrimeFin

  • Fifth decimal available 
  • Spreads begin from 0.03 pips
  • Commission is zero  
  • Full 10-hour support  
  • News alerts and VPS for traders

FAQs

There are several online brokers on which this is possible. It is a good idea to compare these with one another, as they sometimes show significant differences. Therefore, the CFD trading software must have several essential tools.

The leverage makes it possible to trade larger sums with little security. The broker, in turn, lends the customer the appropriate capital for the trade to be carried out.

Depending on the CFD broker, commodities, indices, stocks and currencies are traded.

CFD trading is also possible with smaller sums. According to surveys, the average trading account of a private hobby trader is between € 3,000 and € 12,000

What are the perfect conditions for maximum success in CFD trading? Sooner or later, CFD traders, especially day traders, should meet the following requirements: time and discipline, specialist knowledge of the stock market, a good CFD trading strategy, and sufficient capital.

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