Trading CFDs for a Living

As CFDs gain popularity, more traders are using them to try and make a living. Although a stretch for novices, steady returns are possible for skilled traders who practise risk and money management, follow market data and use a consistent trading strategy. This guide will explain how to start trading CFDs for a living, as well as running through the benefits and drawbacks of the popular derivative product.

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Defining CFDs

First, let’s clarify what CFDs are…

CFDs are financial instruments used to speculate against the change in value of an asset without buying it outright. A CFD is a contract between sellers and buyers that stipulates that the buyer pays the seller the difference between the asset’s current value and its value when the contract expires. Hence, CFD is an acronym for Contract for Difference.

CFDs have become increasingly popular for a couple of reasons:

1. The top brokers offer leveraged CFD trading, meaning clients can increase their position sizes (and profit potential) by borrowing funds in return for a small margin
2. CFDs are a derivative, so investors don’t actually take physical ownership of the underlying asset they are speculating on, for example, a precious metal like gold or silver

Credit: CMC Markets

Dos & Don’ts

Trading CFDs for a living is risky but achievable for experienced investors with a strong understanding of the financial markets. Below we’ve compiled some do’s and don’ts to help improve your chances of success.

Do…

• Limit Leverage – When starting out, be cautious with leverage. While it can magnify returns, trade with too much leverage and even a small price movement can lead to significant losses. Fortunately, most FCA-regulated trading platforms cap leverage to 1:30 for retail traders, though this varies between asset and provider.
• Use Stop Loss Orders – Using stop loss orders as a preventative measure can help minimise your losses. Stop loss orders are triggered when the underlying asset hits a pre-determined price, immediately closing your position. Risk management tools like these are particularly important if you’re trying to trade CFDs for a living, as long-term, consistent returns will be key.
• Get Organised – Develop a strict trading routine to refine your strategy and prevent impulsive actions. Keeping a journal to monitor your investment success rate can help to enhance your trading strategies and prevent you from making the same mistakes.
• Practise – While it won’t make you a salary to start with, free demo accounts are an excellent opportunity to develop trading systems and practise investing under real market conditions. You can then switch to a real-money account when you feel ready.
• Research – Keeping abreast of the latest market news and trading tools can help set you up for success. Does your CFD broker offer integrated news feeds, economic calendars, forex heat maps, or algorithmic trading tools, for example?

Don’t…

• Get Greedy – Understanding that greed is part of human nature is important when trading CFDs for a living. Rationalising your desire to invest can help keep a level head. Lay out a budget as part of your money management strategy to avoid impulsive investments and profit chasing.
• Overtrade – Trading too often can have detrimental effects on your long-term profits. Ultimately, placing lots of trades doesn’t guarantee profits. If you are patient and make the right investments a few trades can earn you decent returns. As Warren Buffet said, to be successful “you only need a couple of swings”.
• Put All Your Eggs in One Basket – When trading CFDs for a living, it is important to spread your exposure across multiple assets to protect your portfolio from unexpected market fluctuations. When the stablecoin Terra crashed in May 2022, some CFD traders that hadn’t hedged their positions lost many thousands of pounds.

Benefits & Drawbacks

Below we have listed the benefits and drawbacks of CFDs to give you a balanced view before you start trading them for a living…

Benefits

• Taxes on Derivatives – Profits from CFD trading are usually considered capital gains in the UK. This means traders have a £12,300 tax-free allowance before racking up a tax liability.
• No Shorting Rules – Traders of CFDs don’t own the underlying asset so they can be shorted at any time with no margin costs.
• Access to Major Markets – The margin trading aspect of CFDs means investors can access key financial markets, for example US-listed technology stocks, that they may not have been able to invest in with traditional financial means.
• Variety of Markets – CFDs enable investment across a range of markets. This means investors can take positions on stocks and shares, major, minor and exotic forex pairs, soft and hard commodities, plus cryptocurrencies like Bitcoin.
• Accommodates Bulls and Bears – CFD trading allows investors to take both long and short positions. This means you can make bearish speculations where you think the price of an asset might drop and adopt a bullish position when you believe the price will rise.
• Leverage – CFDs offer more leveraged trading opportunities than traditional investment vehicles. Leverage for UK retail traders typically ranges from 1:30 to 1:2. Lower margin requirements mean you can stake less and still receive high returns, making it popular with those starting on a budget.

Drawbacks

• Losses – Leverage CFD trading can magnify losses as well as gains. Without an effective risk management strategy, a few losing trades can wipe out a beginner’s entire trading pot.
• Traders Pay the Spread and Commission – With CFDs, traders often have to pay the spread on entries and exits, plus a fixed commission (at some brokers). This means it can be difficult to make a profit during certain trading windows where there is limited volatility and price movement.
• Liquidity Risk – Demand can impact your CFD positions. If the underlying asset has insufficient interest, your contract could become illiquid, which can trigger additional margin payments and premature contract closures with reduced profits.

How to Start Trading CFDs for a Living

So, how can you start trading CFDs for a living? Below we’ve outlined the key steps to get started…

Markets

Pretty self-explanatory, investors must decide which markets they want to speculate upon. CFDs are versatile trading products and offer access to a variety of financial markets from stocks and shares, to commodities and forex.

With that said, it is worth choosing markets that you’re interested in as this makes research more enjoyable and less cumbersome. While not essential, selecting markets you already understand is also advisable so you can apply your existing knowledge rather than starting from scratch.

CFD Trading at FXCC

As outlined above, it’s also worth diversifying your portfolio and taking positions in multiple markets. This will help spread risk when trying to trade CFDs for a living.

Select a Broker

Next, you need to find a suitable CFD broker. You shouldn’t overlook this step as selecting a reputable and high-quality brokerage will have a significant impact on your trading experience. Read user reviews and ratings and consider the following:

• Education and Trading Tools – The best brokers that offer CFD trading will provide extra services to help inform trading decisions. These can include weekly webinars, educational guides and courses, as well as interactive trading charts.
• Demo Accounts – Using a demo account can be a helpful place to start when trading CFDs for a living. Most reputable brokers offer this feature as they know a free trading account can help traders get acquainted with their platform.
• Transparent Fees – The best CFD brokers provide a transparent fee structure outlining all trading and non-trading fees that will impact your profit margin. Look at spreads, commissions, account charges, deposit fees, plus overnight financing rates.
• Customer Service – Excellent customer service is a hallmark of reliable and high-quality brokers. Check the company offers customer support through several channels such as live chat, email, telephone and social media. Most reliable brokers offer 24/7 support in several languages.
• Regulations – Check the broker is regulated by the FCA (Financial Conduct Authority) and look for any additional regulatory licenses which indicate good practice. Signing up with a UK-regulated firm will ensure you benefit from negative balance protection, segregated client accounts, plus restrictions on misleading bonuses and promotions.
• Accessible Platform – The best brokers for trading CFDs will provide an easy-to-navigate desktop platform as well as mobile apps that allow investors to monitor and trade on an iOS or Android device. The most popular terminal with retail CFD traders in 2024 is MetaTrader 4 (MT4).

Strategy

Devising an effective strategy is important if you’re going to start trading CFDs for a living. Try to find a strategy that compliments your trading style and aligns with your risk tolerance and spending limitations.

If you’re skilled at technical analysis, incorporate this into your setup. If you have insights into fundamental factors, you may want to devise a strategy around upcoming news and economic announcements.

It’s also helpful to consider how much time you have to trade and how many positions you want to execute per day. There are numerous trading strategies which require varying degrees of attention. Do you want to be an active, day trader? Perhaps you want to be a swing trader and make predictions over several days or a week.

Bottom Line on Trading CFDs for a Living

Trading CFDs for a living is not straightforward. In fact, most retail traders lose money in the UK.

To get started, you will need a sensible approach to risk and money management, an effective strategy, plus an account with a broker that offers competitive trading conditions. Use our list of recommended firms to start trading today.

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