12 CFD trading tips to survive

Dec 2018
Top 2 CFD brokers
XTB IG
12 CFD trading tips to survive

CFDs are exciting financial instruments that can help you achieve your trading objectives in a user-friendly way. However, CFDs don't come without risks. We only recommend CFD trading to experienced traders. If you're a beginner, it's better to stay away. We have collected 12 CFD trading tips for you that will help to survive in the market.

CFD trading, in a nutshell is using contracts to make a bet whether a particular financial asset, like a stock or a currency pair, will increase or decrease in value.

When you trade with CFDs you do not actually trade with the real underlying financial asset.

For example, when you want to bet on the increase of the oil price, you chose an oil CFD. When the price of the oil increases one percent, the price of the CFD will also increase one percent, so you will gain the price difference of the crude oil. Hence the name: Contract for Difference.

If you are new with CFD trading it is better to first understand what is CFD trading.

Cfd trading tips - infographic

 

Advanced traders, here you have our ultimate CFD trading tips list.

12 CFD trading tips to survive
The 12 CFD trading tips

There’s no secret sauce to investing, so you shouldn’t expect our CFD trading tips to make you a billionaire in two weeks. Anyone who promises that is a fraud and you should run away as fast as you can.

And the list:

1. Use stop-loss orders

Rule #1: use stop-loss orders. Rule #2: use stop-loss orders. Rule #3: use stop-loss orders. If you want to hear our single most useful CFD trading tip, it’s this: make sure you limit your downside by using stop-loss orders, or even guaranteed stop-loss orders. 

2. Use a demo account first

Before you jump into it, we also recommend that you begin your CFD trading career with a demo account, which will be offered by most providers. So if you want to test our CFD trading tips free of charge before risking actual money, it’s a good start. Try it to see if it’s for you.

3. Do your homework

Understand what you do, both in terms of CFD trading basics as well as your particular investment. So don’t start investing before you know what a limit and what a market order is. Don’t trade with forex CFDs before you understand the difference between a USD/GBP and a GBP/USD quote. Also don’t expect that you can be a specialist in all asset classes or in all markets. Choose a small number of specializations and stick with them.

4. Limit leverage

You can use leverage, but when you have the option, consider scaling down on leverage to a level that is acceptable to risk tolerance profile.

5. Use the right trade position

Some brokers do not allow to lower the leverage. In these cases you can lower your trade position. Always be sure about your outstanding risk level. For example, you want to hold $1,000 Apple share position, but the default leverage at your broker is 5 and it cannot be lowered to one. In this case, lower your CFD trade position, so your leveraged position would be $1,000 = 5 * $200.

6. Do your own analyses

Your neighbor, Wilma, is bragging about how much she made on Bitcoin trading. That doesn’t mean she can repeat her performance – and it certainly doesn’t mean that you should jump right in and start trading Bitcoins like your life depends on it. First things first: read research reports, look up articles on the topic, and do your own analyses, fundamental, technical, or even both.

CFD trading tips - Technical analysis

7. Have a trading strategy

Make sure you set up a strategy for each trade before you open it. For example, you should know where to close in both the best and worst case scenarios. Think about potential scenarios of how your investment may perform. What happens when the underlying price goes up by 5%? What if it goes down by 5%? 10%? 50%? You can even prepare a table like our leverage table.

8. Do not run after your money

Make sure that you don’t start running after your losses and are committed to your initial strategy. You make the worst mistakes when you get emotional and start running after your money. Don't do that. Set out your rules and stick to them. For instance if you decide that you will set your stop losses 10% below the purchase price, then don’t deviate from your plan just because you’re a massive fan of Apple and “you’re certain it will do well”.

9. Make the leverage work for you

By using higher leverage you can invest more than you have. This is a nice feature but it requires a responsible approach. Remember the 2008 financial crisis that started out by people taking too big mortgages? Mortgage in itself is a nice instrument, you can buy your house or flat before you have the money for it. But you should only take a mortgage if you can repay it. Otherwise, you will lose your house. CFD trading requires the same reasonable approach.

10. Expect a rainy days

There will be days when your investments will go against you, so always keep enough equity in your account to be sure you can make good on any potential margin calls.

11. Don’t put all your eggs in one basket

CFD investing can help you reach a wide variety of markets and assets, so there’s ample opportunity to diversify. And you totally should. So just because you think oil stocks are the next big thing, don’t go long in Exxon, Shell and BP plus in crude oil at the same time. If you happen to be wrong, you’ll be wrong big time because of leverage already. And in a wider context: don’t rely on making earnings from this source. CFD trading can result in really volatile returns, make sure this is not your only source of income.

12. Choose a reliable CFD broker

Having a good CFD broker can really make a difference in your trading results. The most important thing are the fees. When you trade frequently, the trading fees can carve out a big portion from your results. Make sure your broker is not swallowing all of your trading results. The other thing is safety. Avoid scams. We have compiled for you the list of the best CFD brokers in 2019. If you choose one of them, you can be sure you do not trade with a scam.

If you choose to try our CFD trading tips yourself, you need to find the best CFD brokers to use.

We prepared you a list of the top 5 online brokers which provide CFD trading.

 
Award Best CFD broker Best social trading Best FX broker - -
Overall score 4.5 4.4 4.5 4.4 4.3

If you want to dig deeper into finding the best CFD brokers check out our blog post.Head to our country selector to get detailed info on which broker is available in your country.

Now that you know the list of the best CFD brokers, let's investigate them one by one. 

 

XTB

62

 
Background XTB is primarily a forex and CFD broker and in some countries, you can also trade with real stocks
Overall rate (out of 5) 4.5
Fee rating
Recommended for Forex and CFD traders looking for great funding and withdrawal processes and research tools

Visit broker

CFDs carry risk. In the UK, 79%, while in the rest of Europe 82% of retail investor accounts lose money when trading CFDs with this provider.

CFD trading tips - XTB - Web trading platform

eToro

14

 
Background eToro is a well-known fintech startup, an Israeli social trading broker established in 2007
Overall rate (out of 5) 4.4
Fee rating
Recommended for Beginner traders and those interested in social trading (copying other traders’ trades)

Visit broker

CFDs carry risk. 65% of retail investor accounts lose money when trading with this provider.

CFD trading tips - Etoro - Web trading platform

IG

12

 
Background IG was established in the UK in 1974 and is one of the biggest CFD providers in the world
Overall rate (out of 5) 4.5
Fee rating
Recommended for Traders with any experience level aiming for a great and easy-to-use trading platform

Visit broker

CFDs carry risk. 79% of retail investor accounts lose money when trading with this provider.

CFD trading tips - IG - Web trading platform

Plus500

20

 
Background Plus500 is a CFD broker, established in Israel
Overall rate (out of 5) 4.4
Fee rating
Recommended for Experienced traders looking for an easy-to-use platform, with great user experience.

Visit broker

CFDs carry risk. 80.6% of retail investor accounts lose money when trading with this provider.

CFD trading tips - Plus500 - Web trading platform

 

Markets.com

19

 
Background Markets.com is a global CFD and FX broker established in 2010
Overall rate (out of 5) 4.3
Fee rating
Recommended for Beginner CFD traders

Visit broker

CFDs carry risk. 73% of retail investor accounts lose money when trading with this provider.

CFD trading tips - Markets.com - Web trading platform

12 CFD trading tips to survive
What is CFD trading?

Before we start to list our CFD trading tips, it's important to know what we are talking about.

What is CFD? CFDs are derivative products, which mean that their value is derived from the value of another asset or security – to be more precise, the CFD will follow the price movement of the underlying security. For example if you buy an Apple share CFD, then if Apple’s share price goes up, so will your CFD’s value.

CFDs started out as a type of leveraged equity swap in the 1990s in London, primarily used by hedge funds. In the late 1990s CFDs appeared on the retail market as well, while the 2000s and 2010s saw the first exchange traded and centrally cleared CFDs – so things really picked up. The FCA estimated that the number of UK CFD brokers doubled between 2010-16 and UK clients held £3.5bn in their accounts in total. Of course, the picture is not completely rosy. Because of the risks inherent in these contracts, regulators are increasingly strict with CFD brokers. The Australian Exchange closed its CFD exchange in 2014, while in some countries, such as the United States or Belgium, CFD trading is outright banned. The European financial regulator, ESMA also set up more stringent rules in the summer of 2018.

In the below example, you can compare the profit/loss effect of a no leverage equity position and a 10 times leverage CFD position. You buy both the equity and the CFD when the underlying price (e.g. Apple share price) is USD 100.

 

CFD trading tips - How leverage works

The advantages of CFD trading

There are four key differences between investing in securities directly and purchasing a CFD.

  1. Lower trading fees. Trading fees can be lower in certain countries. For example, if you’re a UK investor, you don’t have to pay stamp duty like you would in case of stock trading. 

    To compare more fees, visit our fee comparison page.
     

    Compare CFD fees

  2. You can short. It is a lot easier to “go short” – you can bet that the price of a particular security will go down, which otherwise may be tricky or impossible for a retail investor.
  3. Wider market and products coverage. Because of the derivative nature of CFDs, issuers can offer more diverse products since from basic stocks to more exotic products like the cryptos. 
  4. Smaller trades. You can usually choose the trade size of a CFD, that can be as low as a couple of dollars. This might not be possible with the real underlying product, where the minimal trade sizes can be as high as thousands of dollars. A good example for this is the oil.
  5. Use of leverage. A small investment can already earn you nice and fat returns if you take advantage of the leverage smartly. Say you bought that Apple share CFD for $100 on a 10% margin or 10x leverage (i.e. you only paid $10, the rest of the $100 price is the leverage). If the price goes up to $109 your return will be ($10 + $9) / $10 – 1 = 90%, whilst if you invested in the actual shares, your return would have only been ($100 + $9) / $100 = 9%.

You are right – the last part sounds too good to be true.

Well, the bad news are that there is always a catch. Leverage is a delicate thing, it exaggerates your gains as well as your losses, therefore investors should be extra cautious.

If instead of going up, the Apple share CFD price went down from $100 to $90, your initial investment of $10 would have been completely wiped out, and your loss would have been -100% not -10%. 

A step-by-step guide to CFD trading

1. Practice with a demo account

Before getting into CFD trading, try a demo account. See if you can do well in a safe environment, and don’t assume your performance will be any better with real money.

2. Open your real account

This quite easy and fast with a CFD broker.

3. Fund your account

Don’t put your life savings in it. Start small – and we really mean small! – and keep in mind that you are using leverage, so you don’t necessarily need that much money anyway. You can usually fund your account via a credit/debit card, bank transfer and electronic wallets, like PayPal.

4. Choose your asset and set the leverage.

Again, if you want to hear one of our best CFD trading tips: you don’t have to max out on leverage. Make sure you did your research and you are not placing an order just because your mate Jimmy swore it was the deal of the century. At some CFD brokers you can set the level of leverage, while at others you have to go with the maximum leverage. We will recommend later in this article a couple of good CFD brokers.

5. Start trading by placing orders

Place your order by choosing your order type and term. Do not forget to set up stop-loss orders if necessary.

6. Monitor your trades

Once your order is executed, don’t forget to review and monitor your investments regularly.

Available markets and asset types

A good thing about CFDs is that you have a wide range of opportunities to trade with. You essentially can choose any market or asset class, chances are that you will find CFD trading opportunities for each. Just to name a few:

  • Stocks
  • Forex
  • Stock indices
  • Commodities (metals, energy and beyond)
  • Bonds
  • Options
  • Cryptos

CFD trading tips - Products

Similarly, the available markets are also quite varied, e.g. a European investor can invest all over the world from Canadian stocks to Asian indices. 

Compare CFD product portfolio

12 CFD trading tips to survive
Risks of CFD trading

CFD trading is a risky business. And we don’t mean the sort of business Tom Cruise ran in his classic 1983 movie. In the FCA’s consultation paper, published in December 2016, the UK regulator estimated that c.80% of CFD investors lost money. Yes, less than 1 in 5 persons made a profit on these investments. You may be that one lucky guy or gal, but be realistic. You are a lot more likely to make losses than to make gains. Besides relying on our CFD trading tips, listed above, you should also be aware of the following pitfalls.

CFD trading tips - Risks and pitfalls

 

  • Leverage. We already touched this.
  • Counterparty risk. When you trade over-the-counter, you have a contract with another person / institution (your counterpart) about a future transaction. When you enter into a contract like this, there’s always a risk that your counterparty will not honor the agreement and not pay you out.

See broker comparison table

  • Fraud and scams. One of the reasons we started Brokerchooser was to help you “distinguish between rouge and real”. We are pretty sure you have already been targeted with aggressive popup ads promising easy life and a yacht with two hours of online trading a week. Just stating the obvious, all of these ads come from scam brokers or let’s call them just scam, since they don’t have to do anything with brokerage. There are tons of scams out there so make sure you only use reliable brokers. Our broker reviews are there to help you.
  • Non-transparent spread pricing. You can’t make sense of the pricing of CFDs? You’re not alone. It’s absolutely non-transparent and brokers don’t seem to be as bothered about this as we are.
  • Margin call. This shouldn’t happen to you. Margin call means that your investment fell and the money on your account is not enough to make good on your losses so you’ll need to send in some extra money. Back to our dull Apple example: you bought an Apple CFD for $100 on $10 margin. Some bad news hit the market and the price of your CFD falls by $20 down to $80, meaning that your balance is $10 margin less the $20 loss, i.e. negative $10. It’s your investment, you’ll have to make good on this loss.
  • Slippage. Executing trades takes some time – an even if it’s not a long time, it’s long enough for some prices to move. Slippage means that the order is executed at a different price than what you saw when you placed the order (i.e. your decision price). Say you have $100 in your account and you placed four trades around the same time, each requiring $25 margin. In some cases the price may move up before your order is executed and now the margin on your first trade is $26 not $25, meaning that you cannot execute all your trades.

12 CFD trading tips to survive
Keep in mind - Safety

What happens when you trade with CFDs issued by your broker and the broker becomes insolvent? Though it's not directly related to CFD trading tips, it's important to ask the question: will you be covered by the national investor protection schemes, like UK’s FSCS (Financial Services Compensation Scheme)? The good news here is yes, you will be protected. 

The global CFD trading regulation is quite fragmented. In general, you can do it in Europe, while the rest of the world is mixed. For example, CFDs are banned in the US, while allowed in Canada. In Europe, Belgium is the only country where you cannot trade with CFDs.

We recommend only quality brokers, so you can be sure none of the above listed online brokers are scams. They are regulated by top-tier regulators. Some of them are also listed on an exchange.

However, also brokerage companies can go down. Remember Lehman Brothers? In these cases, it is important to know what happens with your securities and cash on your account. These are usually held in segregated accounts, so even in case of the bankruptcy of the broker, you are safe.

If everything goes very bad and for example, the broker steals your assets, then you have a last resort, the investor protection of the country where the broker is regulated.

The investor protection amount differs from country to country, so worth checking this before opening an account.

 
Account protection you get £50,000 for UK clients; €20,100 for other European clients £50,000 in Europe £ 50,000 for UK residents, € 20,000 for residents of non-UK countries £ 50,000 in the UK, € 20,000 in other European countries € 20,000
Country of regulation UK, Poland, Cyprus, Belize EU, Switzerland, Singapore, Japan, South-Africa, UAE UK, Cyprus UK, Cyprus, Australia, Singapore Cyprus and South Africa

Wondering which authority regulates your broker?

Filter brokers by investor protection

12 CFD trading tips to survive
CFD trading tips - Bottom line

CFDs are exotic animals in the world of investments, and only well-prepared investors should try to hunt them down. Our CFD trading tips are a good start, but make sure you do your homework. Learning by doing is often a good way to approach things, but losing your life savings just to learn how not to trade CFDs is not a good tradeoff.

So last few words: limit your losses, keep your head cool, and don’t go overboard. Investing can be a great experience, and you can enter into markets which you otherwise couldn’t.

Still interested in trading with CFDs? If you are uncertain which the best CFD broker in 2019 is, this little summary might provide further clarity.

 
Overall rate (out of 5) 4.5 4.5 4.4 4.4 4.3
Brokerchooser award Best CFD broker Best FX broker Best social trading Best CFD App -
Fee rating 4 stars 3 stars 4 stars 4 stars 3 stars
Account Opening Rating 5 stars 4 stars 5 stars 5 stars 5 stars
Deposit and withdrawal rating 5 stars 5 stars 4 stars 5 stars 5 stars
  Visit broker Visit broker Visit broker Visit broker Visit broker
CFD risk warning CFDs carry risk. In the UK, 79%, while in the rest of Europe 82% of retail investor accounts lose money when trading CFDs with this provider. CFDs carry risk. 79% of retail investor accounts lose money when trading with this provider. CFDs carry risk. 65% of retail investor accounts lose money when trading with this provider. CFDs carry risk. 80.6% of retail investor accounts lose money when trading with this provider. CFDs carry risk. 73% of retail investor accounts lose money when trading with this provider.

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