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Day trading with CFDs is a popular strategy. From pattern day trading in the US, to day traders in Europe and beyond, the leverage and costs of CFD trading, make it a viable option for active traders and intraday trades. This page provides an introductory guide, plus tips and strategy for using CFDs, and offers a list of the best brokers for CFD day trading in A CFD is a contract between two parties.
They agree to pay the difference between the opening price and closing price of a particular market or asset. It is therefore a way to speculate on price movement, without owning the actual asset.
The performance of the CFD reflects the underlying asset. Profit and loss are established when that underlying asset value shifts in relation to the position of the opening price. When trading CFDs with a broker, you do not own the asset being traded.
You are speculating on the price movement, up or down. Lets use an example. There might also be commission or trading costs. Actual levels of leverage or margin will vary. This makes it an attractive hunting ground for the intraday trader. The risk and reward ratio is increased, making short term trades more viable. When you enter your CFD, the position will show a loss equal to the size of the spread.
Using the above example: So in terms of percentage, the CFD returned much greater profits. Had the market moved the other way, losses relative to our investment would have been larger too — both risk and reward are increased. There are of course other benefits to owning an asset rather than speculating on the price. We also ignored commissions and spreads for clarity.
But the above does illustrate the relative differences in the two methods of investing. CFD trading with oil, bitcoin, and forex are all popular options, for example. Despite the numerous benefits, there remain a couple of downsides to CFDs you should be aware of. One of the selling points of trading with CFDs is how straightforward it is to get going. There are thousands of individual markets to choose from, including currencies, commodities, plus interest rates and bonds.
Try and opt for a market you have a good understanding of. This will help you react to market developments. Most online platforms and apps have a search function that makes this process quick and hassle-free. If you buy you go long. If you sell you go short. Bring up the trading ticket on your platform and you will be able to see the current price. The first price will be the bid sell price. The second price will be the offer buy price. The price of your CFD is based on the price of the underlying instrument.
If you have a reason to believe the market will increase, you should buy. If you believe it will decline you should sell. You now need to select the size of CFDs you want to trade. With a CFD, you control the size of your investment. So although the price of the underlying asset will vary, you decide how much to invest. Brokers will however, have minimum margin requirements — or more simply, a minimum amount that is required in order for the trade to be opened.
This will vary asset by asset. It will always be made clear however, as will the total value or your exposure of the trade. Volatile assets such as cryptocurrency normally have higher margin requirements.
This will help you secure profits and limit any losses. They tie in with your risk management strategy. Once you have defined your risk tolerance you can place a stop loss to automatically close a trade once the market hits a pre-determined level. This will help you minimise losses and keep your accounts in the black — leaving you to fight another day on subsequent trades.
A limit order will instruct your platform to close a trade at a price that is better than the current market level. If you opt for a trading bot they will use pre-programmed instructions like these to enter and exit trades in line with your trading plan. These are perfect for closing trades near resistance levels, without having to constantly monitor all positions.
You can view the market price in real time and you can add or close new trades. This can be done on most online platforms or through apps. You will be able to see your profit or loss almost instantly in your account balance. Choosing the right market is one hurdle, but without an effective strategy, your profits will be few and far between. You need to find a strategy that compliments your trading style.
That means it plays to your strengths, such as technical analysis. It also means it needs to fit in with your risk tolerance and financial situation. This simply requires you identifying a key price level for a given security.
When the price hits your key level, you buy or sell, dependent on the trend. This is where detailed technical analysis can help. Use charts to identify patterns that will give you the best chance of telling you where the trend is heading. This is all about timing. Then you enter a buy position in anticipation of the trend turning in the other direction. You can follow exactly the same procedure if the price is rising.
You can short a stock that has been increasing in price when you think a sharp change is imminent. Both Wave Theory and a range of analytical tools will help you ascertain when those shifts are going to take place. However, there is always a loss on the horizon. So, you need to be smart. Nobody wants the margin calls and the stress that come with big losses. Having said that, start small to begin with.
Keep your exposure relatively low in comparison to your capital. As your capital grows and you iron out creases in your strategy, you can slowly increase your leverage. A bit like a diary, but swap out descriptions of your crush for entry and exit points, price, position size and so on.
This will be your bible when it comes to looking back and identifying mistakes. CFD trading journals are often overlooked, but their use can prove invaluable. A thorough trading journal should include the following:. It may sound time-consuming but it will allow you to constantly review and improve. Each trade you enter needs a crystal clear CFD stop. This is because emotions will inevitably run high and the temptation to hold on that little bit longer can be hard to resist.
So, define a CFD stop outside of market hours and stick to it religiously. This will also help you anticipate your maximum possible loss. You can then use the time you would be fighting an internal battle to research and prepare for the next trade. However, the switched on day trader will test out his strategy with a demo account first. Plenty of brokers offer these practice accounts.
You can make sure it has all the charting and analysis tools your trading plan requires. The best traders will never stop learning. You need to keep abreast of market developments, whilst practising and perfecting new CFD trading strategies. Learning from successful traders will also help.
To name just a few:. This is mainly because of taxes. Different countries view CFDs differently. Some consider them a form of gambling activity and therefore free from tax. Some countries consider them taxable just like any other form of income.
The tax implications in the UK, for example, will see CFD trading fall under the capital gains tax requirements. This means you should keep a detailed record of transactions so you can make accurate calculations at the end of the tax year.
Once you know what type of tax obligation you will face you can incorporate that into your money management strategy.
For more detailed guidance, see our taxes page. Day trading CFDs can be comparatively less risky than other instruments.