CFD Day Trading

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Tobias Robinson

Tobias is a UK director and partner at Investing.co.uk. He provides commentary on the financial markets in the UK and supports the testing team with first-hand observations from over two decades of active trading.

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William Berg

William is an experienced investment writer with a history in forex trading software localization and IPO consultancy. He contributes as an author and fact-checker for established financial websites.

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As a type of agreement that allows traders to speculate on the price of an underlying asset without owning it, contracts for difference (CFDs) are an ideal option for day traders. The market for CFDs has flourished since these derivatives became available to UK investors in the 1990s, with rapid growth in recent years bringing the monthly average number of UK CFD traders to over 560,000 in 2020. This guide will give investors all they need to know about CFD day trading in the UK, from strategies to the best online CFD brokers.

CFD Day Trading Basics

• Traders use CFDs to bet on price movements of an asset
• CFDs are a derivative, meaning traders do not take physical ownership of the underlying asset, for example gold
• CFDs are legal in the UK, regulated by the FCA, and are widely available on popular trading platforms
• Day traders typically speculate on short-term price fluctuations that happen within a single trading day

A CFD is an agreement between an investor and an issuer, which allows the investor to bet on whether the price of an underlying asset will rise or fall. Since CFDs allow traders to make leveraged bets on price movements of assets such as stocks, indexes and currencies without owning them, they are ideal for day traders looking to earn money on short-term trades without undertaking long-term exposure.

CFDs are available to UK investors through brokerages and trading platforms, including some of the country’s most widely used and trusted sites. One of the quickest and easiest ways to begin day trading CFDs is through a popular trading platform such as Pepperstone. Different platforms will give traders access to different markets, including stocks and shares, indices, commodities and forex.

CFDs operate on a margin basis, and most platforms and brokers will need a deposit of around 10 percent of the contract value when the trade is opened. Since CFD issuers often require a minimum deposit to be held in accounts, traders may need to top up their deposit if they make a loss on a trade.

Getting Started

To get started with CFD day trading, an investor must first decide on which asset they wish to speculate on and which direction they think the price will move.

If they think the FTSE is going to rise, for example, the trader can open a long position with an online broker. If they open a contract on FTSE shares worth £10,000 when the trade is opened, and the price has risen to £11,000 by the time the trade is closed, the broker will have to pay the investor the £1,000 difference minus any fees. If the trade goes against the investor, their losses will be deducted from their deposit.

Leverage

As outlined above, many day traders use CFDs to make leveraged trades, meaning they can use borrowed funds to gain exposure to much larger trading positions than would normally be available to them. UK regulations limit the amount of leverage available to individual investors to 1:30 for currency trades and around 1:5 for stocks and shares. It’s worth pointing out that UK traders can access larger leverage rates if they day trade CFDs with an offshore, unregulated provider, though this brings with it additional risk.

Credit: IG

So, leverage can greatly increase gains made in a good trade, but it will also magnify losses to the same extent. Traders must be able to cover the entire contract value plus costs if a trade goes against them, so caution is advised when trading on high leverage. With astute use of leverage, however, CFDs can net large profits on relatively small price movements over a short time frame, making them an ideal option for day trading.

Note that if a trader keeps a leveraged trade going overnight or over a weekend, they may be required to pay an overnight or rollover fee, usually about 2-3 percent above the overnight fee charged by a bank.

Taxes

If they profit, traders are usually responsible for reporting their gains for tax purposes. In the UK, individual investors’ profit from CFDs is normally classed as capital gains and taxed accordingly. One advantage of CFDs is that, since the investor never actually purchases the underlying asset being traded, they are exempt from stamp duty. See our guide to trading taxes for more information.

CFD Day Trading Strategies

Like most investing, CFD day trading can be unpredictable. But by planning carefully and sticking to a few basic principles, traders can ensure they make the most of their good runs and limit their losses when trades turn against them. Some of the most important steps toward building a winning CFD day trading strategy are listed below.

• Choose the right trading broker and online investing platform
• Carefully research the market, for example currency pairs with GBP
• Develop an effective CFD day trading strategy
• Practice paper trades on a demo account
• Implement systems to limit risk
• Keep a trading journal

Choose the Right Broker

A wide range of brokers and platforms offer day trading on CFDs, and there may be a great difference in service and charges among any two. For example, typically brokers make money from the spread on forex and commodities trades, but some may also charge a commission. Another major difference is the range of assets available, as this limits the options available to traders who wish to deal with a particular stock or currency pair.

Besides these factors, it is important to choose a platform which is easy to use and provides all the necessary features. Investors who favour fast-paced trades will prefer a responsive system with minimal lag. Those who plan to trade CFDs alongside other investments may wish to find a flexible platform which allows them to keep their investments in one place and smoothly move funds around when the need arises.

Research the Market

Before a day trader thinks about putting their money at risk, they should have a good knowledge of the asset they are trading. Different assets will have different volatility levels and other characteristics, and these must be considered. Beginners are usually advised to stick to lower volatility assets, such as the GBP/USD currency pair.

Researching the asset’s price history is a great starting point, but investors should also closely follow market news and be sure they are aware of factors that could influence the price positively and negatively.

Choose a Strategy

Once investors are familiar with their CFD day trading platform and the asset they wish to trade, they can begin to research and practice different strategies. Some traders use technical analysis to predict an asset’s top and bottom price limits and trade on the swing between these two levels.

Others prefer to try to follow the momentum of price movements with a high volume of very short trades in a fast-paced strategy known as scalping.

Whichever strategy suits your style best, it is usually a good idea to get plenty of practice on a virtual account or with low-stakes trades before you move on to larger amounts and higher leverage.

Paper Trading

One of the most useful actions a trader can take is to spend time making paper trades before they start with real money. Many platforms allow users to open demo accounts and make paper trades on real assets without risking their cash. This gives new traders a chance to test their mettle before taking the plunge with a real day trade. It also allows more experienced traders to safely learn the ins and outs of a new platform so they can quickly and confidently hit the right buttons when the time comes to make a real CFD day trade.

Implement Risk Strategies

Leveraged CFD day trading can lead to large losses in a single unlucky trade, so it is vital for traders to plan carefully to limit risk. Most CFD platforms will automatically provide negative balance protection, which prevents a user from losing more than they hold in their online account. Investors should ensure they are aware of their platform’s policy before trading, but they should also implement their own measures with every trade.

Credit: eToro

Many platforms allow users to set automated orders which will end a trade once the price reaches a predetermined level. Day traders should take full advantage of stop-loss orders to cut their losses when the price is moving unfavourably. For example, if a trader opens a short position on stocks of Company A at £100 with a stop-loss order set at £105, their position will automatically close when the price reaches £105. This is especially useful for leveraged trades in which even a small price movement in the wrong direction can lead to substantial losses.

Similarly, traders can set orders which will automatically close some or all of their position once they reach a certain level of profit. This counters the natural human tendency to get greedy when a trade is panning out well, ensuring that the CFD day trader will earn profit on the trade even if the price movement suddenly turns against them.

Keep a Journal

You may wish to simply forget about the CFD trades that don’t pay off, but noting them down alongside your successful trades in a journal can prove helpful for aspiring day traders. Your trading journal will not only allow you to analyse your past trades to see what worked (or didn’t), it will also serve as a record of your net profit or loss throughout the year so you are not stumped when the time comes to pay taxes.

Bottom Line on CFD Day Trading

CFDs are one of the most convenient ways to begin day trading in the UK, since they allow investors to make leveraged trades on a range of assets without having to own them. Since CFDs are FCA-regulated and available on reputable platforms with built-in risk-management systems, they are also a relatively secure way to trade. However, traders should always be wary of the risks involved in leveraged trades, since these multiply losses as well as profits.

FAQs

Is CFD Day Trading Legal In The UK?

Trading contracts for difference is both legal and popular in the UK, with CFDs available from many platforms on a range of assets from stocks to forex. However, cryptocurrency CFDs are not typically available in the UK, since the FCA has banned all crypto derivatives. Instead, British investors will need to register with an offshore provider to speculate on cryptos using CFDs.

What Is The Best Way To Day Trade CFDs?

Each trader will have their own requirements when day trading CFDs, so it is important to shop around to find the best broker or platform for your financial goals. Some may prefer the platform with the lowest fees, while others will look for one that has the quickest and most responsive interface for making fast-paced trades. See our list of the best CFD day trading brokers to get started.

Do CFD Day Traders Make Money?

In the end, CFDs like all derivatives are risky, and a bad trade coupled with high leverage can quickly wipe out a trader’s investment capital. By the same token, it is possible to make outsized returns when a CFD trade goes your way. Whether or not a trader makes money in the long run is largely determined by their ability to manage risk.

Is CFD Day Trading Good For Beginners?

There are several options for beginners who wish to start day trading with CFDs. The first and best is for them to invest their time in a virtual trading account, which will let them trade CFDs to their heart’s content without putting any real money at risk. Once they have a good grasp of trading on the platform and how to manage risks, they can move on to trading with real money.

Is CFD Day Trading Risky?

All day trades carry risks, but the leverage usually employed in CFD trades has the potential to multiply those risks many times over. The key to successful trading is to manage risks by carefully planning your trade and setting realistic stop-loss orders. Traders should also ensure they trade on a platform that has negative balance protection in case a trade wipes them out, and take profits regularly when the market moves in their favour.