CFD trading tips to master your skills in 2021

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

CFD trading, in a nutshell, is making a bet whether a particular financial asset, like a stock index, commodity or a currency pair, will increase or decrease in value.

When you trade CFDs, you do not actually own the real underlying financial assets.

For example, if you want to bet on the euro strengthening against the pound, you can go long on the EUR/GBP CFD. If the euro is up 1% against the pound, the price of the CFD will also increase by 1%. Hence the name: Contract for Difference.

If you are new to CFD trading, it’s a good idea to read this chapter first to understand what CFD trading is.

12 CFD trading tips to help you survive on the market

12 CFD trading tips

We do not possess a secret formula to successful trading, so you shouldn’t expect our CFD trading tips to make you a millionaire overnight. But we do believe that the following points are worth keeping in mind if you want to avoid some of the common pitfalls of CFD trading and make the most out of the experience.

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. Don’t know what a stop-loss order is? You can learn about stop-loss and other common order types here.

2. Use a demo account first

Before you jump straight into it, we suggest that you begin your CFD trading career with a demo account, offered by many online brokers. If you want to test our CFD trading tips free of charge before risking actual money, a demo account is a good place to start. If you open a demo account, it’s a good idea to test it with an amount that you’d be actually willing to trade with in real life. In this way, you’ll see more realistic returns and performance. Do you have, let’s say, $1,000 set aside for CFD trading? Enter this as a virtual amount in your demo account, start “trading” and see if you like the outcome.

3. Do your homework

Make sure you understand what you’re doing, both in terms of CFD trading basics and your specific trading portfolio. So don’t start trading before you know what a limit order or a market order is; again, you can find more info about these order types in this article. Don’t try to trade forex CFDs before you understand the difference between a USD/GBP and a GBP/USD quote. And don’t expect to become a specialist in all asset classes or all markets. It’s better to pick a niche (or two) and stick with it.

4. Limit leverage

You can use leverage, but consider this: in most cases, it is unrealistic to think that the price will always instantly move in the desired direction after you opened a position. If leverage is very high, a small move (say 0.1%) in the wrong direction might force you to close out the position and you won’t be able to profit if the price bounces back and starts moving in the “right” direction. Leverage levels of as much as 400:1 are not unheard of; however, at least in the EU, regulators have imposed a 30:1 maximum limit on leverage for major currency pairs. Which brings us to the next point…

5. Use the right trade position

Some brokers do not allow you to lower the leverage manually. In these cases, you might want to consider lowering your trade position. Whatever the case, always make sure you’re aware of your outstanding risk exposure.

6. Do your own homework

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 depended on it. First things first: read research reports, look up articles on the topic, and do your own analysis – fundamental, technical, or both.

7. Devise a trading strategy

Make sure you set up a strategy for each trade before you open it. For example, you should consider in advance where to close your position, in both best-case 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 falls by 5%? 10%? 50%? You should think through how big a loss you can tolerate, or how big a profit you’d be happy with on that particular position.

8. Consider cutting your losers

Now comes the difficult part. If things go south, make sure that you don’t start chasing your losses and that you remain committed to your initial strategy. You’ll likely make the worst mistakes when you get emotional and want to “win back” what you’ve lost. Don’t do that. Set out your rules and stick to them. For instance, if you decide to set your stop-loss 10% below the purchase price, then don’t deviate from this plan just because you’re a massive fan of that particular stock and you’re convinced that eventually it will do well.

9. Leverage works both ways

Leverage is a double-edged sword – we can’t stress this enough. By using leverage, you can invest more than you actually have. This is a nice feature for sure, but it requires a responsible approach. Leverage doesn’t only amplify your gains; it also amplifies your losses. Are you prepared to lose everything in your account? If not, be careful with the leverage ratio you choose (if you’re allowed to choose at all) and make sure you set the size of your trade position right.

10. Prepare for rainy days

There will always be days when your trading positions go against you, so always keep enough equity/cash in your account, in case you need to put up additional margin. Some brokers don’t issue margin calls at all; they will simply liquidate some of your positions if you fall below margin requirements. This can happen precisely at the worst moments – so do your best to prevent it.

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

CFD trading can give you access to 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 crude oil at the same time. If you are proven wrong, you’ll be wrong big time, because these assets are all correlated and are likely to move in the same direction. And in a wider context: it’s probably not wise to rely on CFD trading alone for a living. CFD trading can result in really volatile returns (or even big losses), so 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. For one thing, fees are very important. When you trade frequently, trading fees can carve out a big chunk of your profits. When trading CFDs, the most important cost is the spread cost: the difference between the bid price and the ask price. Make sure you find a broker that determines spreads in a way that doesn’t eat up all of your trading results. And then there is safety. You should do your best to avoid scams. To help you with that, we have compiled a list of the top five CFD brokers; you can rest assured that all are considered a safe choice. Below is a brief description of each, but if you want to find out more (including our methodology for selecting these top brokers), head over to our best CFD brokers article.

12 CFD trading tips to help you survive on the market

Top CFD brokers fees

Best broker fees compared

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5
12 CFD trading tips to help you survive on the market

What is CFD trading?

As we guide you through CFD trading, it’s important to start with the basics.

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

CFDs started out as a type of leveraged equity swap in London in the 1990s, primarily used by hedge funds. By the late 1990s, CFDs found their way to the retail market as well, while the 2000s and 2010s saw the first exchange-traded and centrally-cleared CFDs, laying the foundations of dynamic growth. The UK’s Financial Conduct Authority (FCA) estimated that the number of UK CFD brokers doubled between 2010 and 2016, and that UK clients held a total £3.5bn in their accounts. But that growth tells us only one side of the story. Because of the risks inherent in trading CFD contracts, regulators are becoming increasingly strict with CFD brokers. The Australian Securities Exchange closed its CFD exchange in 2014, while in some countries, such as the US or Belgium, CFD trading is banned outright. The European financial regulator, ESMA also introduced more stringent rules in 2018.

In the example below, you can compare the profit/loss effects of a no-leverage equity position and a 10:1 leveraged CFD position. You buy both the equity and the CFD when the underlying price (e.g. Apple share price) is $100.

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 trader, you don’t have to pay stamp duty like you would in case of stock trading. For a detailed rundown of fees, visit our fee comparison page.
  1. You can short. It is a lot easier to “go short” using CFD trading – allowing you to bet that the price of a particular security will go down, which otherwise may be tricky or impossible for retail investors in most asset classes.
  2. Wider market and product coverage. Because of the derivative nature of CFDs, issuers can offer more diverse products, from single stocks to more exotic products like cryptos.
  3. Smaller trades. You can usually choose the trade size of a CFD, which can be as low as a couple of dollars. This might not be possible with the real underlying product, where minimum trade sizes can reach thousands of dollars. A good example of this is oil, where the size of a standard futures contract is 1,000 barrels, worth tens of thousands of dollars.
  4. Use of leverage. Even a small investment can earn you nice and fat returns if you use leverage smartly. Let’s say you bought that Apple 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 gain will be $9, translating to a whopping return of $9 / $10 = 90% on your initial $10 investment; whereas if you invested $100 in the actual shares, your $9 return would have only translated to $9 / $100 = 9%.

Sounds too good to be true? Well, it is true, but there is a catch.

Leverage is a delicate thing, and it amplifies your gains as well as your losses; therefore traders should be extra cautious.

  1. If, instead of going up, the Apple CFD price fell 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 when you start risking real money.

    2. Open your real account

    This is nowadays quite easy and fast with any 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, or even electronic wallets such as PayPal.

    4. Choose your asset and set the leverage

    Let’s revisit one of our best and most important CFD trading tips: you don’t have to max out on leverage. And when choosing an asset, make sure you do your research and that you are not placing an order simply because your mate Jimmy swore it was the deal of the century. At some CFD brokers, you can set the leverage manually, while at other brokers this is not possible and you have to go with the default pre-set leverage.

    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 trade positions regularly.

    Available markets and asset types

    A good thing about CFDs is that they give you a wide range of trading opportunities. Whatever markets or asset classes you have in mind, chances are that you will find CFD trading opportunities for each. Just to name a few:

  • Single stocks
  • Forex
  • Stock indexes
  • Commodities (metals, energy, etc)
  • Bonds
  • Options
  • Cryptos
  1. Likewise, available markets are also quite varied. For instance, a European trader can easily find CFDs with underlying assets from all over the world, from Canadian stocks to Asian indexes.

12 CFD trading tips to help you survive on the market

Risks of CFD trading

CFD trading is risky business. And we don’t mean the sort of business Tom Cruise ran in this classic 1983 movie. In 2016, the FCA estimated that ca. 80% of CFD traders lost money. Yes, that’s right: less than 1 in 5 persons made a profit on these instruments. You may be that one lucky guy or gal, but we suggest you stay realistic. You are a lot more likely to make losses than to make gains. Besides relying on our CFD trading tips, you should also be aware of the following pitfalls

  • Leverage. We already discussed this.
  • Counterparty risk. When you trade over-the-counter, you make 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 won’t honor the agreement and fails to pay you out.

  • 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 scams, since often they aren’t really brokers at all. There are tons of scams out there, so make sure you only sign up to reliable brokers. Our broker reviews are there to help you.
  • Non-transparent spread pricing. The spread is the difference between the bid price (price you sell at) and ask price (price you buy at). You can’t make sense of the pricing of CFDs? You’re not alone. Most of the time it’s not very transparent at all, but brokers don’t seem to be as bothered by this as we are.
  • Margin call. This is something you don’t want to happen to you. A margin call means that the value of your trade position falls so much that the money on your account is no longer sufficient to make good on your losses, so you’ll need to deposit some extra money. Back to our Apple example: you bought an Apple CFD for $100 on a $10 margin. Some bad news hit the market and the price of your CFD falls by $20 to $80, meaning that your balance is $10 margin minus the $20 loss, i.e. a negative $10. It’s this amount that you need to deposit in order to make good on your loss.
  • Slippage. Executing trades takes some time – and even if it’s just a short time, it’s long enough for some prices to move. Slippage is a situation when the order is executed at a different price than what you saw when you placed the order (i.e. your decision price). Let’s say you have $100 in your account and you placed four trades around the same time, each requiring a $25 margin. It’s possible that, for whatever reason, the price moves up before your order is executed and now the margin on your first trade is $26, not $25. As you only have $100 in your account, this means that you cannot execute all of your trades.
12 CFD trading tips to help you survive on the market

Keep in mind - Safety

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

  • Global CFD trading regulation is quite fragmented. In general, CFD trading is allowed in Europe, but the situation in the rest of the world is mixed. For example, CFDs are banned in the US but allowed in Canada.

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

However, brokerage companies and other financial service providers can still go down, no matter how big or reputable. Remember Lehman Brothers? In such cases, it is important to know what happens to your securities and the cash in your account. Local authorities in many countries have set up investor protection schemes to deal with such situations.

The investor protection amount differs from country to country; also, cash and securities do not always enjoy the same protection. Therefore it’s worth checking what you’re eligible for before opening an account.

You can see in the table below the protection amount applicable to clients of the top 5 CFD brokers.

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5
12 CFD trading tips to help you survive on the market

CFD trading tips - Bottom line

Our CFD trading tips are a good start, but make sure you always 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 perhaps not the best idea.

A few final words, then: limit your losses, keep your head cool, and don’t go overboard. Trading can be a great experience, and CFDs allow you to access markets that you otherwise couldn’t.

So are you interested in trading CFDs? If you’re still not sure which is the best CFD broker in 2022, this little summary might provide further clarity.

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5

Still not sure? Get a personal recommendation. Or feel free to check what CFD brokers are available in your country.

Compare brokers

Compare broker tool

Compare selected brokers by their fees, minimum deposit, withdrawal, account opening and other areas. Filter according to broker or product type, including stocks, futures, CFDs or crypto.

Best Brokers
Broker Reviews

Compare broker tool

Compare selected brokers by their fees, minimum deposit, withdrawal, account opening and other areas. Filter according to broker or product type, including stocks, futures, CFDs or crypto.