Understanding how a CFD trade works is essential for anyone starting out in contracts for difference. A CFD trade allows you to speculate on rising or falling prices without owning the underlying asset. In this lesson, we’ll walk through the full trade process—from opening and managing a position to closing it and calculating your result.
Opening a Trade
When you believe an asset will rise in value, you open a CFD trade by choosing to ‘buy’ (go long). If you expect the price to fall, you choose to ‘sell’ (go short). You select your position size and confirm your trade through your trading platform.
CFD trades use leverage, meaning you only need a small deposit—called the margin—to open a much larger position. This amplifies both potential profits and losses.
Managing the Position
Once the trade is open, the profit or loss fluctuates with the market price. Many traders use stop-loss and take-profit orders to manage risk and lock in gains. You can monitor your position live and adjust it if market conditions change.
Some CFDs involve overnight funding charges if held past market close. Be sure to check your provider’s terms before holding trades overnight.
Closing the Trade
You can close your CFD trade manually or automatically using an order. The difference between the opening and closing prices determines your profit or loss—multiplied by the position size.
For example, if you bought a CFD on oil at $70 and sold it at $75, you’d profit from the $5 increase per unit. If it moved against you, the same calculation would apply in reverse, generating a loss.
Final Thoughts
To recap how a CFD trade works: you speculate on price movements by opening a leveraged position, monitor the trade, and close it when you’re ready. Knowing how a CFD trade works in practice can help you manage risk and make more informed trading decisions. Practise on a demo account to build your skills before going live.