CFD Trading Tutorial - Sample Trade Walkthrough

You may be familiar with trading stocks, bonds, options, and even Forex. But have you ever thought about trading CFDs? If not, we've put together, as part of our tutorial, an article which will walk you through a CFD trade. The imaginary trade will apply the principles of leverage, position sizing, and transaction costs which we discussed in the first section of our CFD trading tutorial.
The first section of the tutorial examined the benefits and costs of trading CFDs. The costs include:
*The interest you must pay for holding a position overnight
*Brokerage fees and commissions
*Slippage which results from trading illiquid CFDs.
Now it's time to look at how trading CFDs actually works. By understanding the trading process, you'll also understand how leverage will affect your profitability, and how to determine exactly the costs involved in a given trade.
We'll begin by establishing position sizing rules.
Suppose you have $5,000 cash available as your trading float, and your CFD provider will offering a leverage of 10 to 1, which gives you a leveraged float of $50,000. We'll also stipulate that you've decided to go with a fixed trade size for your position sizing model, and that you'll be putting $5,000 into each individual CFD position.
Setting Your Stop Loss
Now we'll consider your stop loss. You should never trade without having a stop loss in place to protect your investment if the market turns against you. Since your trade was at $7.50, you can place a stop loss at $7.22. If the CFD you are trading falls to $7.22 or below, you'll automatically be stopped out of the trade. This means you'll exit it with a 5% loss, but that's better than watching it continue to fall.
But suppose the trade goes the way you want it to, and the price begins to increase? Suppose the upward trend continues for two or three days, and the CFD is now trading a $7.80? In this case, you can stay with the trend as long as you adjust your trailing stop up to $7.65, locking in half your profits.
Setting Your Trailing Stop Loss
What if, for some reason, the financial gods have smiled on you, and your CFD continues to soar until it hits $8.20? Time for another trailing stop adjustment, to $8.00.
Of course, no investment will go up forever, and your trailing stop will save you when the CFD begins to retreat and you get stopped out of your position at $8.00, if there has been no slippage (because you chose a highly liquid CFD). You held your position for a total of fourteen days, from the time you entered it until you were stopped out.
You entered at $7.50 and exited at $8.00, for a $.50 profit on each CFD. So you'll multiply .50 x 667, for a profit of $333.50. But that's the gross profit, from which you'll have to subtract your costs.
The transaction costs include your commission, and the interest charges you paid for holding your position for two weeks. We'll explain how to compute all of that in a later section, but for this trade it came to about $45. So your net profit for this trade will be about $288.
This sample trade will give you a clearer idea of what's involved in trading CFDs, and while it may be somewhat different from trading Forex or other investments, you should be able to master the concepts with only a bit of practice!
Want to learn more about CFD trading online? Then see this site by Kurt Magnussen that features CFD trading tutorials and a list of the top CFD brokers and CFD providers online to trade with. Get the latest and top tips on CFDs and trading them in today's market.