CFD trading examples. Learn from actual CFD trade examples

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CFD Trading Examples – All You Need to Know

Updated on: 6 January 2020

No matter how many articles and guides you might read, understanding the mechanism behind the CFD trading is not as easy as you might suspect. Let’s put it this way. You might be able to catch on the essentials, but it is the details that will eventually get to you.

I know how much of a trick it is to actually understand how CFD trading works in different markets or when dealing with various assets, subjected to different rules. I have been there. Which is why I have decided to put up several examples for you to have a better understanding of the processes.

That, along with some useful tips for each case in particular.

How to trade CFDs 101

As you probably know, there are a lot of things you need to learn before actually proceeding in engaging a trade. So, let’s just assume you have already done your homework and have good knowledge of the basics of the CFD trading. If not, feel free to browse my other articles to update your knowledge book.

But if you did, then it means you are somewhat ready of understanding the following examples.

Example 1:

A long position trade (you decide to buy shares, as you expect them to increase in value over a given timeframe)
You decide to take on Asda, the famous UK retail supermarket you have had your eyes on for quite a long while. One major representative of the business announces a massive partnership with E-bay. I know, this is a hypothetical scenario, bear with me. In this case, we have 1 educated course of action, with 2 potential opposite outcomes. Because we are dealing with CFDs, remember? So, the educated course of action is:

In this case, you have the following data:

  • One Asda CFD share is worth 250 pence (£2,50)
  • You buy 10,000 shares, totaling £25,000
  • The deposit you are required to have to maintain a £25,000 position is 10%, totaling £2,500
  • You will pay a commission of 0.1% for opening your trading position, totaling £25

Closing the trade on profit

  • At the moment of the closure, one Asda CFD share is now worth 275 pence (£2,75)
  • You sell all your 10,000 shares, totaling £27,500, at which moment your raw profit is £2,500 (the difference between the share’s value when the market closed and the one when it first opened)
  • You will pay a commission of 0.1% for closing your trading position, totaling £27,5
  • What you will be left with is £2,472. This is the return profit you are getting. You already have the £2,500 in your account, which you were required to have in order to control a £25,000 position. Those didn’t go anywhere. Now, on top of that, you get £2,472 extra, as a return profit after the trade closed. This is a return rate of 99.8%. You have doubled your money with one simple trick. And trading beginners now hate you. Good job!

But, let’s say something happens and the partnership gets canceled for some reason. You leave your position open overnight and you notice the apocalypse first thing in the morning. Not enough time had passed to allow you to record legendary losses, but a certain damage exists nonetheless. So:

Closing the trade on loss

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  • At the moment of the closure, one Asda CFD share is now worth 235 pence (£2,35)
  • You sell all your 10,000 shares, totaling £23,000
  • You will pay a commission of 0.1% for closing your trading position, totaling £23,5
  • Your account will now show a loss of £1,500. Let’s break down the facts. You had £2,500 as a margin, used to leverage a position of £25,000. The position crashed by 15 pence per share, at which moment your account registered a loss based on the initial position you had. So, now we have £25,000 minus £23,500 (the assets’ value at the trade closure) equals £1,500. So, your account will now have £1,000 left.

And this is all without calculating other commissions and fees that may come into play. It is quite easy, if you ask me, and I am sure you don’t think it is complicated either. However, here is what I would like you to know and be careful about, in this particular case. I am talking about the precise reasonings you need to go through.

– Are the news legit? – If they are not, you may be in for a bust. Sure, a high-position representative has announced a major partnership. When is the deal set to take place? Are there any words from the other camp? Are there any news confirming this rumor? Never go blind into the action. Or, in this case, one-eyed, because you do have something to work with, after all.

– Have the shares begun to rise following the statement? – As soon as you hear the news, start digging. Most markets will start burning even at the whiff of a rumor, not to mention rock solid proofs. Check the company’s shares and see how they move. If you notice an explosive trend, go for it immediately. It doesn’t even matter if the news are fake. Go for it and keep a close eye on your position. As soon as you get some profit, close it and go home. Instant win.

– You need a stop loss order – I don’t care how verified the news is, or how sure of the outcome you are. It simply isn’t worth it to lose so much money. If you take a look at the “Closing the trade on loss” section, you will only see a £1,500 loss on a £25,000 starting margin. This is an extremely fortunate outcome, because, due to the use of the leverage, your losses have the potential of reaching 600-700% or more. Keep that in mind.

These advices go the same for the rest of the examples as well.

Example 2:

A short position trade (You decide to sell shares as you expect them to decrease in value, over a given timeframe).

Facebook on the line. Several anonymous statements come out, announcing the company’s involvement in supporting Islamic terrorist propaganda and allowing such Facebook accounts to spread related content on its platform. Another hypothetical scenario.

What you now have is:

  • One Facebook CFD share is worth 550 pence (£5,50)
  • You sell 1,000 shares, totalling £5,500, with the prospect that the shares will drop in value
  • The short position doesn’t work on leverage, but you still have to have a margin deposit in place, this time going up to 150% of the amount you are selling the shares for, so £7,750. The margin, in this case, however, has no role to play, because, with short sale trades there is no leverage involved. You sell CFDs and you get back the same amount of CFDs and you get to keep the money.
  • You will pay a commission of 0.1% for opening your trading position, totalling £5,5

Closing the trade on profit

  • The Facebook CFD drops as expected and the share is now worth 450 pence (£4,5)
  • You buy 1,000 shares again, spending £450, to control a £4,500 position, and close the trade
  • Let’s do the math. You sold £5,500 worth of shares, waited for the market to do its thing and move towards the direction you have predicted, then bought the same amount of shares, this time for £4,500. The result is that you now have the same amount of shares you had before, plus a profit of £1,000.

It is an extremely effective and simple system and it pays off big time if applied to some highly volatile situations, where the company’s shares move into your direction by a significant and accelerated rate.

But let’s consider that all the rumors about Facebook turn out to be false fast enough to only affect the company for an extremely short period of time. In this case, you will sell your shares, without knowing what is about to hit you. And we have:

Closing the trade on loss

  • The Facebook CFDs drop as expected, but only by a limited amount. Then the market decides that Facebook is actually trustworthy and the shares start gaining value. The share reaches 600 pence (£6).
  • You see the market going against you, you corroborate that trend with the recent exoneration, so you make the decision to close the position, which can be done by purchasing the 1,000 shares back, for which, this time, you pay £6,000.
  • Should we do the math, or is the result obvious enough? You sold the shares for £5,500 and bought them for £6,000. This shows you are now £500 in the hole.

Example 3:

This time we have Apple. A news article comes out, accusing Apple of releasing a new, innovative tablet that will feature the most potent processing power on the market. You see the online environment roaring and the news piling up.

The data you will get is:

  • One Apple CFD share is worth 400 pence (£4)
  • You buy 10,000 shares, totaling £40,000
  • Again, you need to maintain a £40,000 position, which means your margin account needs to contain 10% of the position, totalling £4,000
  • The 0.1% commission applies, leading to a £40 minus

Closing the trade on profit

  • The market grows and the Apple share reaches 500 pence (£5)
  • You sell the 10,000 shares, getting £50,000 in return
  • You already know the answer, am I right? The difference between the share’s starting price and the closing one is £10,000. Minus the £40, we get £9,960. With a starting margin of £4,000 and a net profit of £9,960, we can conclude a staggering profit increase of 249%.

But, as you already know the drill, let’s assume the new device gets canceled due to unexpected costs of sudden software faults. What is more important is that another major competitor announces the release of a new device, seemingly operating with the same technology. Apple seems to have been beaten. As a result:

Closing the market on loss

  • The market immediately takes action and the shares drop to 300 pence in an instant (£3)
  • You sell the 10,000 shares to close the trade and get £30,000 in return as leveraged position
  • Can you spot the difference? The assets’ initial price of £40,000 has now become £30,000, leading you to receive a £10,000 blow.
  • Remember that 249% profit rate? This time you have the same rate, but on the negative side.

What have you learned?

These trading examples in CFD are meant for one purpose: helping you understand how the market works and how it can turn on you in the blink of an eye. You will not hear this from a lot of brokers, but leverage is a hell of a danger.

Leverage is great as means to increase your profit more than you could have ever dreamed of, but absolutely horrifying when going to wrong way. Your losses could be potentially unlimited. And what I have tried to show you with the help of these examples is that there are plenty of risks you need to be aware of.

Can you avoid them, or, at least, keep them at bay for as much as you can? Yes. Here is how:

1. Don’t take the market for granted

With CFD trading, the market will always work in your favor when you link it to major economic or financial worldwide events. In the sense that you can easily identify the trend or the direction it is heading. But, as these examples are showing, even major economic news can turn the other way quite rapidly.

Maybe we have some unverified news that sends shivers in a certain sector, that end up being exposed as fake. Or some rumors that could turn true, with intense immediate effects. These sudden swings will ultimately reflect onto your investment. Be very careful how you take them, even when they appear to be rock-solid.

2. Don’t invest too much, even if the trade is safe

As specified at point 1, the market might appear safe at one moment, and can go the opposite direction at the next. It is always better to win less and risk losing less, than to win more and risk losing more, as long as you don’t have too much capital to work with anyway.

It may be feasible for experienced traders, with a lot of capital in hand, to go for higher risks, but not for you.

3. Close your position as soon as you see it stalling

Let me explain. If you have bought 1,000 shares on Facebook, basing your choice on the news regarding the company’s implication in terrorist propaganda and you see the shares falling, you immediately sell all 1,000 of them, expecting them to fall even more.

And they do, but then they soon reach one point where they stall. It is here where you need to start worrying. I will tell you why. Because the news that Facebook is indulging Islamic terrorist propaganda is massive. The shares shouldn’t stall after only dropping by a little. If they do, this might show a tendency of rising again.

At which point you need to buy as fast as you can, even though the profit is not too high. At least you won’t lose money.
So, as you see, these CFD examples are only a sample of what the trading market has in store for you. And I know it takes a lot of experience and gut-feeling to sense the market’s movements, but it can be done. All you need is to train your market feeling and work on understanding how it all comes together.

Feel free to experiment with software trading demos to help you improve your game. And always play it safe.

Forex trading examples

Forex Trading example

Forex trading allows you to speculate on price movements in the global foreign exchange market. Currency values rise and fall in relation to each other and in response to national and international economic, financial and political events.

When trading forex, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency.

You can choose to trade FX through CFDs, spot FX and spread bets.

Learn more about the type of FX trades available here.

Selling (going short) GBP/USD as a spread bet

Traders are bracing themselves for Brexit. You expect the pound to depreciate against the US Dollar, i.e. the US Dollar will strengthen against the pound, and decide to sell (go short) £5 a point at 1.22262.

Note: in this example the margin as well as the p&l are calculated in pounds.

The winning trade

You were right about your suspicions, and the Pound drops against the Dollar. The rate drops to 1.22045, at which point you close your trade, netting 108.5 in profit.

The losing trade

You market didn’t move as you expected, and instead Brexit has revitalized the Pound and pushed it higher. The Pound climbs to 1.22489 before you decide to close your position.

Buying (going long) GBP / USD as a CFD trade

The jobs market in the US appears to be stalling and you expect the level on Non-farm Payrolls to come in below analyst’s estimates.

You believe that the US dollar will weaken and the British pound will strengthen against the US dollar, and decide to buy (go long) 1 CFD (per 0.0001) on GBP/USD at 1.2300.

Margin and Profit/Loss are calculated (and denominated) in the second, or counter currency of the pair.

The winning trade

Good news, Non-farm Payrolls came in weaker than expected and the dollar slumped sending GBP/USD higher. GBP/USD is now trading at 1.2380 / 1.2382 and you decide to sell to close at 1.2380.

You bought at 1.2300 and sold at 1.2380, a rise of 80 pts. This gives you a profit of $80

City Index automatically converts trading P&L into the client’s denominated account currency at the prevailing market rate at the time that the trade is closed.

Losing trade

Let’s look at what would have happened if the actual non-farm payroll data had come in better-than-expected, the US dollar would have strengthened against the pound, sending GBP/ USD lower.

If GBP/USD fell and you sold to close at 1.2250 you would lose $50.

A sell trade (going short) on EUR / USD as a spot FX trade

Investors are concerned about the upcoming elections across Europe and you expect the euro to fall against the US dollar. You decide to sell (go short) €20,000 at 1.0650.

In forex trading, the trade size is in units of the first, or base, currency in the pair

EUR/USD has a margin factor of 3.33%

The margin as well as the p&l are calculated in dollars, the counter currency of the pair.

Winning trade

The euro drops against the dollar as political event risk increases and you decide to buy €20,000 at 1.0570 to close your trade with a profit of $160.

City Index automatically converts trading P&L into the client’s denominated account currency at the prevailing market rate at the time that the trade is closed.

Losing trade

Supposing a weaker dollar across the board pushes the euro up by 50 points and you buy to close at 1.0700 you would have lost $100.

Note: in this example the margin as well as the p&l are calculated in pounds.

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CFD Trading Meaning

What is CFD Trading?

Difference Between CFD and Spread Betting

Want to Learn CFD Trading?

Start with our free Introduction to Trading course, which will give you a solid foundation in price action trading through Spread Betting and CFD.

Move onto our free Decisive Package for further free education, designed to get you ready to trade live, as well as give you free access to a professional trading course.

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Guide to CFD Trading & CFD Trading Meaning

On this page, we will look at the meaning of CFD trading and explain how you can use it to trade.

CFD stands for Contract for Different. It is a derivative, which means that you never own the underlying asset that you are trading. Instead, you make an arrangement in a futures contract and the settlement differences are made in cash, rather than by the delivery of the physical goods.

CFDs allow you to trade a very wide range of instruments, including Forex, Indices, Commodities, etc. If you want to trade in Gold, for example, it is a lot easier to use a CFD rather than having to take physical delivery of gold bullion. CFDs provide traders with the benefits (and risks) of owning a security, without actually owning it.

A CFD also allows you to go long (buy) and go short (sell) the market. This means you can look to profit from a riing market as well as a falling market. This is because a CFD is an agreement between two parties. It states that the seller will pay the buyer the difference between the current value of an asset and its value at ‘contract time’.

Since you do not own the underlying asset, there are also tax advantages to trading CFDs (at the time of writing).

Features of CFD Trading Including Leverage and the Meaning of Leverage

All CFD trades are leveraged. This means that you only need to deposit a small fraction of an asset’s total value when you trade. For example, if you wanted a trade £10,000 worth of Vodafone shares, you would only need to deposit as little as £500 initially. Some brokers offer as much as 1:300 leverage. This means that for every £1 you have available to trade with, the broker will essentially ‘loan’ you a further £300 to trade with.

Although this has many benefits, including that you can make large profits in comparison to the size of your account, leverage also carries with it a number of risks. As it can magnify your profits, so can it magnify your losses. It is important to understand leverage and employ some common sense and risk management when utilising it for your trading.

To find out more about leverage, consider our free Introduction to Trading course, which is designed to give you a solid foundation as you start learning about CFD trading and trading in general.

The cost of CFD trading in comparison to other instruments is low. A broker will charge you a ‘spread’ for placing the trade. Because there is so much competition between brokers, the spread on major markets tends to be small. Coupled to this the fact that margin requirements are relatively low for CFD trading, it means you can trade with a smaller account than if you were trading the actual asset.

You are also charged ‘holding costs’ if you keep a CFD trade open for more than one day. Although these tend to be relatively small, it can add up if you are holding a position for weeks and months.

Hedging using CFDs

CFDs are often used as a type of insurance to protect against other potential losses by using them to ‘hedge’. If you foresee a short-term risk in your long-term investments, the profit you make from a short CFD trade on the same market may offset the loss to your long-term portfolio.

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