When it comes to making your savings grow, investors have several choices. Options that present extremely variable levels of risk and return. The Online trading is one of those options. Often criticised for lack of adequate knowledge and training, investing your money in the financial markets - and more specifically in CFDs - is wrongly considered to be a sort of very random lottery.
In our ultimate guide, we will detail what CFD trading is, its economic potential, its strategies, how it works on the stock market as well as the pitfalls to avoid in order to lose money.
CFD Trading: what is it?
Let's start our immersion in the world of CFD trading with:
A definition of CFD;
A concrete example of a successful trade.
Explanation of CFD trading
The acronym CFD stands for Contract For Difference. This English acronym encompasses any action taken by a CFD trader to trade on the financial markets without owning (buying or selling) the so-called underlying assets. CFD trading brings with it a large number of concepts such as leverage, margin, short selling or hedging.
CFD trading therefore concerns all negotiation actions (signing of a bilateral contract) carried out by an investor to buy or sell CFDs. In other words, contracts for the difference in French. Trading CFDs means that a trader has the possibility of intervening in all financial markets - forex, stocks, crypto currencies, commodities, indices - without ever owning said financial instruments. A CFD trader speculates on the price of the underlying assets, and can therefore make money if the quoted price goes up or down, but also losing money is always a high possibility when trading CFDs.
In other words, CFD trading forms contracts between buyers and sellers, who agree to trade on the price difference of a financial product between the time of purchase (opening a position) and the time of its closing (closing of position).
Online CFD trading comes with a whole lot of technical jargon that you should be aware of to be sure you understand the issues and risks inherent in this type of investment strategy. As we said just before, all markets are affected. When we talk about forex CFDs, we are talking about trading in derivatives of currency pairs.
In the same way, a CFD on the CAC 40 corresponds to an underlying asset which makes it possible to benefit from upward and downward movements in the price of the index of the 40 largest French companies. CFDs on the Stock Exchange concern all segments. It is possible to trade on the trend of international equities like Apple or Google, without having to pay the sometimes significant entry fees for a single security.
CFDs are closely linked to the leverage effect, which offers the possibility, via a credit granted by the broker of its choice, to increase its investment capacity without increasing its initial capital. For example, according to European regulations (ESMA), the leverage effect on forex CFDs is limited to 30:1 (i.e. amount invested multiplied by 30) for retail investors. Brokers authorise or not a position opening depending on the level of margin available, depending on the importance of this leverage.
We speak of a short position when a trader positions himself for sale (forecast of a fall in the price of an asset). Conversely, we say that an investor chooses a long position when he makes a buy trade (speculation on a rise in the market price).
Before definitely embarking on CFD trading, it is important to choose a suitable broker. In this regard, the editorial staff advises eToro. It has a wide range of CFD products. Its application and interface are intuitive. In addition, its copy trading functionality allows everyone to copy in real time the best traders from around the world.
Example of a successful CFD trade on the CAC40
Let us illustrate this definition with a CFD simulation. Let us take our example of a CFD trade on the CAC 40. A CFD trader, after a complete technical analysis (via financial indicators in particular), decides to open a position on the CFD of the CAC 40 index. His analysis indicates to him that the trend is bullish. It is therefore positioned on a ( long ) purchase.
If, as he had expected, the price of the CAC 40 index continues to rise, it will make a profit. It collects the difference between the price at the time of purchase and that at the time of closing. This difference is calculated in pips. The price of the pip depends on the amount invested and the leverage chosen.
Conversely, if the trend moves in the opposite direction to the forecast, the CFD trader loses money. The use of an intelligently placed Stop Loss allows you to limit losses and maintain good money management.
CFD trading: the capital importance of the choice of broker
We have mentioned it many times in other guides on how to invest effectively in the stock market, depending on the different financial markets, the choice of your broker is essential to offer yourself the best possible chances of becoming profitable.
We have focused our attention on 3 criteria, which seem essential for CFD trading: the available assets, the price list and the technical tools.
CFD Trading: look at the available underlyings
It still seems important to us to pay real attention to the catalog of financial instruments available from CFD brokers on the market.
Indeed, even if it may seem unnecessary when you are a beginner since, very often, we train on a particular type of asset (forex, shares, indices, crypto currencies, commodities, etc.), it is important to ''open a trading account that offers a large number of different opportunities to diversify your portfolio.
In addition, the advantage of CFD trading is that the platform approach remains the same regardless of the market concerned. The objective is to establish the most reliable forecasts possible when deciding to buy or sell a CFD. It is therefore very easy to trade on several markets with identical technical tools and similar mechanisms: opening a position on a chart, defining a Stop Loss / Take Profit, using technical indicators, defining a leverage effect, etc.
The more underlying assets available, the more it is possible for the CFD trader to take advantage of a large number of opportunities, at any time of the day, in the very short term (scalping), short term (day trading) and medium term (swing trading).
CFD training focuses on the mechanisms of the Stock Exchange and provides information on the high volatility (and therefore high risk) of the instruments offered in CFD trading version.
CFD trading prices & commissions
This point directly affects the profitability of a portfolio. The weight of brokerage fees is not to be taken lightly. Indeed, CFD trading often leads to the opening of a very large amount of positions in order to earn enough money to be financially interesting. In addition, the volatility of asset prices may lead to a need to open additional positions to cover the losses observed.
A broker is mainly remunerated via the spreads and the commissions applied to the positions. The higher these spreads and commissions, the more they will affect the profitability (in the medium or long term) of a CFD trader's portfolio.
Before opening a trading account and making a capital deposit, it is imperative to carefully study the price list of CFD brokers. Some charge very advantageous fees, even free (eg: eToro and XTB practice Zero commission on shares), while others apply competitive call prices to lose all interest due to hidden or additional charges (on the account management for example: transaction fees - deposit and withdrawal, or inactivity as at Admiral Markets).
The software and platform for CFD trading
What is the place of CFD software? This is a point that we could overlook, convinced that brokers seek our comfort above all. However, not all trading platforms are created equal on the market.
There are 2 large reliable schools: the MetaTrader software suite and ProRealTime on CFDs. It must be admitted that a very large majority of CFD brokers base the structure of their trading interfaces on MetaTrader (in version 4 or 5). The software is designed to meet the specific needs of short-term trading with great intuitiveness in the use of trading tools (technical indicators, chart, time period, etc.). Depending on the broker, the functions are more or less extensive, with a more or less ergonomic layout.
ProRealTime is not widely used among CFD brokers. This trading software is very often found with stock brokers, including (online) banks that offer the management of a portfolio such as Ordinary Title Account (CTO) or PEA. Stock brokers (like DEGIRO) also base their technical infrastructure on PRT, which responds much more to user expectations, with access to a selection of underlying products.
Our main advice is to find a trading platform that matches your personal needs and preferences. It is essential to feel comfortable with, at first, the basic functionalities and the CFD trading environment. The reliability of the software and the responsiveness of the platform (especially in terms of execution times) must be irreproachable to guarantee serious monitoring of a portfolio. Consulting user reviews is an easy trick to implement and provides a good basis for prior study. If necessary, using a free demo account is a very interesting test to see if a broker matches us or not.
Becoming a CFD trader: where to start?
Now that we have covered all the theoretical part prior to opening an account, let's focus on a few fundamentals to increase your chances of success in CFDs on the Stock Exchange: education, training and social trading.
Get quality training on CFD trading
Many experts agree on a common idea: trading CFDs is one of the most difficult disciplines. Why make such an observation? Trading in derivative products has many advantages, but the discipline is not without its drawbacks, mainly risk management which is particularly sensitive in the face of very volatile products. Volatility is certainly a powerful lever for taking advantage of multiple trend opportunities, but it represents a probability of loss that should not be ignored. That is why we can only encourage novice investors to educate themselves before committing any euro to the CFD markets. How can they take CFD training?
Most brokers include more or less comprehensive training courses in their commercial offers. If it is a question of 100% beginner traders, it is preferable to avoid training courses that only cover the fundamentals. We recommend progressive learning paths that explain the concepts using concrete examples, or even application on the demo account when it exists.
It is also possible to follow other training courses external to brokers. The Internet is full of quality content in different formats: ebooks, Youtube videos, tutorials, expert articles. Stock market experts have also created their own (often) paid training courses with varying levels of quality.
Once again, it is good to compare the different options before deciding. Learning how to trade is essential in order to be as successful as possible. However, it is essential to choose a learning path that corresponds to its earning objectives and its acquisition methodology. Once the basics have been mastered, it is easier to define a reliable investment strategy to make money in the short, medium and long term.
CFD simulation & demo trading: is it worth it?
CFD Trading is no exception. While it is possible for a potential trader to train via a simulation and / or a CFD trading demo account, our opinion is clear: this approach is 100% judicious. For a few days, weeks or months, a demo account that offers a simulation in real conditions of CFD trading is by far the best learning possible. This is an opportunity to appropriate the rules and codes of the financial markets, to understand brokerage fees, the importance of technical indicators to define a trend and follow a strategy or to see how money management is is inseparable from any financial investment.
When a broker's platform integrates a demo client account for a free simulation, this offers the additional advantage of discovering, without the slightest risk, all the technical features of the software offered. This represents a time necessary for:
Grant oneself the right to make mistakes without disastrous consequences for initial capital;
Define or specify financial objectives in line with a strategy based on CFD trading;
See the enormous potential of negotiating a contract on such assets;
Gain confidence to avoid the psychological biases inherent in trading by following a strict strategy / money management.
CFD & Social trading: do they mix?
This is a legitimate question in relation to a functional trend that is increasingly present among brokers. As a reminder, social trading is an investment strategy that allows you to take advantage of trade information from referring investors in order to either directly copy one or more positions, or to collect technical data that allows you to establish your own strategy. Social trading mainly consists of a social network dimension with expert exchanges on a dedicated platform, and a software dimension that offers tools such as automated or non-automated copy trading. For example, the broker eToro is known worldwide for its comprehensive social trading platform. Admiral Markets also offers an attractive social trading offer.
From a practical point of view, social trading and CFDs go hand in hand. Such an approach - fast and intuitive - perfectly corresponds to the Internet and social network philosophy where people with a common center of interest (the online stock market) exchange and share their advice, questions and strategies. If we add the software features that automate the copying of positions, without going through the technical analysis box, social trading is a very interesting asset for novice users. They can hope to increase their capital, continuing to train and reduce the level of risk as much as possible.
However, it is reasonable to keep in mind that social trading is not a substitute for in-depth knowledge and advanced mastery of the mechanics of the stock market. It can be adopted as an initial strategy and then in addition to personalised management of an asset portfolio. It should be remembered that many brokers do not guarantee any security or consideration in the event of a sudden closure of CFD positions on the part of the referring traders. Such situations can generate situations which undermine capital.
What is the best underlying for CFD trading?
There is no easy answer to this question. We've
highlighted this many times in this Ultimate Guide
to CFD Trading.
CFDs represent an almost infinite number of
opportunities in the financial markets. The best
underlying product is the product that fits with an
investment strategy defined by capital, objective
The more volatile the market, the more likely it is to
seize attractive opportunities. For example, the forex
(the currency market), very volatile, is perfectly suited to scalping for a multiplication of positions over a short period of time (a few seconds / minutes) by taking advantage of micro variations. More than 5,000 billion dollars are traded daily.In addition, the forex market is open 5 days a week, 24 hours a day.
Equity CFDs are another great option for investors who are relying on a less aggressive approach, with a longer view. It is therefore possible to take advantage of softer fluctuations in the prices of shares of listed companies, without owning the shares. On the rise as well as on the fall.
There is no better underlying for CFD trading. But dozens, if not hundreds, of derivative assets that fit into a more global vision. The stated goal is to take advantage of a maximum of opportunities on a maximum of markets, without certain constraints linked to the negotiation of direct asset contracts. CFD trading is an interesting and dynamic introduction to the diversification of a financial portfolio.
Top Strategies for CFD Trading
Several strategies lend themselves rather well to the negotiation of each type of CFD contract: day trading, scalping and swing trading.
CFD day trading
What does the daily life of a day trader consist of? Its mission is relatively simple. A CFD investor is considered to be trading when he enters at least 10 contracts (positions) per day, and closes this volume of contracts within 24 hours. This allows him to avoid potential costs due to overnight (overnight costs) or gaps (gap between the closing price of the day before and the opening price of the next day) which can be very dangerous. Especially for small capital.
Day trading adapts well to CFDs since both are motivated by a multiplication of positions to spread the probability of loss, while benefiting from several opportunities in the markets. Small amounts spread over the whole of a trading session with the ambition of obtaining more than 50% of winning trades to be considered profitable.
Scalping Trading CFDs
The scalping trading is, somehow, the spiritual son of day trading. Its mechanism is the same: take advantage of micro variations in asset prices by positioning yourself in the right direction of a trend. Scalping is a juxtaposition of small contracts over very short durations, from a few seconds to a few minutes maximum. It is a high risk strategy because it is very aggressive, and which is motivated by the realisation of a large number of transactions, the most profitable possible thanks to the leverage effect, while seeking the minimum level of loss.
Scalping can quickly lead to overtrading where the trader constantly increases (and without the necessary hindsight) his number of transactions in order to either increase his gains exponentially, or to cover his losses accumulated over a session. Scalping requires great self-control to avoid falling into its pitfalls. CFD trading lends itself very well, especially forex, to such an investment strategy.
Swing trading CFDs
Last strategy totally adapted to CFDs: swing trading. Unlike day trading and scalping, swing trading is a medium-term strategy. A swing trader is an investor who issues contracts that last longer than 24 hours and do not exceed 7 days.
It is often considered that swing trading is perhaps the most difficult CFD trading strategy since it is necessary to be able to perform a technical analysis strong enough to forecast the trend of an asset over several days, while making enough profits. to cover brokerage fees on holding positions over several days.
Some assets lend themselves better to swing trading than others. For example, CFDs on stocks, indices and cryptocurrencies are more suited to this strategy because they are less affected by too much volatility, and often framed by reduced fees on longer transactions.
The best indicators for CFD trading
Considering that CFD trading is trend trading, there are certain financial indicators that are absolutely essential to reduce risk and maximise success. Here is our selection:
Moving Averages or MM;
MACD stands for Moving Average Convergence Divergence;
The RSI for Relative Strength Index;
OBV for On Balance Volume;
The Ichimoku cloud.
A technical indicator does not work alone. It is imperative to pair it with at least one other, which focuses on one or more important signals. The goal is to confirm or deny a trend before taking a position. In addition, depending on the market context, some indicators are more relevant than others. It is therefore a good idea to determine when to use them effectively.
CFD Trading: Scam or Opportunity?
It's time to end the popular rumour that makes it very clear that CFD trading is a scam.
The opportunity of CFD trading
How is CFD trading a real opportunity?
Trading CFDs is a boon for all traders who want to get the most out of all the stock markets, as easily as possible. It is a simplified access, from a single trading account, to all families of instruments under smooth conditions. From a single platform, a trader can trade, under optimal conditions and in the short term, several contracts with real opportunities to make money by taking advantage of the rise and fall of market prices. There is always the high possibility of losing money too when trading CFD.
CFD trading: why is it not a scam?
CFD trading is not a scam since in no case do brokers hide a high probability of losing the financial investment through contracts for difference. The mechanism of leverage is very attractive, but remains for the benefit of brokers in all cases. It is essential to protect yourself from certain advertisements, which only present the lucrative aspects of CFD trading. Where appropriate, what should be pointed out is not financial discipline in itself, but rather the commercial platforms which do not always meet the conditions necessary for quality security and support, including The objective is to deceive their clients to collect their funds through questionable practices.
Trading CFDs: the pros and cons
Benefits of CFD trading
Access to a wide range of financial assets;
Profit in rising and falling markets;
Increase in earnings through leverage;
Diversification of its portfolio and cover certain losses;
Potential market access live or DMA.
Disadvantages of CFD Trading
Spread payment for the financing of CFDs;
No ownership of assets with potential benefits (eg dividends from a real share of a listed company);
Increase in losses through leverage (see margin).
CFD Trading: Common Mistakes
A novice trader is in essence an investor who does not have sufficient knowledge to make money on the stock market, and who is therefore exposed to the risk of losing his capital. He therefore makes mistakes which can have dramatic consequences. Here is our selection of the most common mistakes:
Not having an investment and money management strategy. Where and when to take a stand? What level of losses tolerated? Where and when to close an order?;
Do not control your emotions and fall into the biases of the psychology of the trader;
Not having confidence in your own analyses;
Do not regulate its presence on the markets (or overtrading);
Believing yourself to be smarter than the markets;
Do not specialise in 1 or 2 types of assets;
Do not dare to take the plunge from the demo account to the real account.
This list is obviously not exhaustive. Newbie traders don't make all of these mistakes simultaneously. We are impacted differently by feelings of failure, achievement, and ego. Trading CFDs requires significant mental toughness to make the right decisions at the right time.
How much money does it take to become a CFD trader?
There are no real rules about investing to become a CFD trader. We have said this over and over again throughout this guide. CFDs offer the use of leverage which increases the investment capacity, without increasing the deposited capital. Thanks to this double-edged mechanism (losses increase proportionally in the event of losing positions), clients on a low budget can still position themselves in the markets.
It is important to invest only the money that you are ready to lose and therefore not essential to your daily life. In case of hesitation, it is always possible to make a minimum deposit in accordance with the general conditions of the broker. From a few dozen to a few hundred euros. Some specialists agree on an optimal amount of 1000 euros for CFD trading, as this offers enough margin to traders in the event of a succession of losing trades.
Conclusion: should you start trading CFDs?
We cannot hide that CFD trading is not the easiest and most secure approach on the stock market. The high volatility of CFDs and the use of technical analysis can impart an aura of inaccessibility. The equity and even cryptocurrency market seems less complex and presents a reduced probability of loss with its longer term approach and historical valuation of the markets.
Still, CFDs are a great investment opportunity for all trader profiles, large and small. Like other markets, we recommend training upstream in order to become fully aware of risk exposure and its level of tolerance in the face of it. Flexible with great potential for profitability, trading CFDs is a natural part of dynamic management of a stock portfolio.