Contracts for difference (CFDs) can seem confusing when you’re just starting out. To help you gain confidence, this beginner-friendly glossary explains essential CFD trading terms in simple language. We’ve also included quick examples so you can understand each concept in context. By the end, you’ll be familiar with the key terms you’ll see on trading platforms and in educational resources.
Basic CFD Trading Concepts
Contract for Difference (CFD): A CFD is a financial contract that allows you to speculate on price movements without owning the underlying asset. Essentially, you agree with a broker to exchange the difference in an asset’s value from when you open the trade to when you close it. For example, instead of buying actual gold, you could trade a gold CFD – if the gold price goes up, you profit; if it goes down, you incur a loss. CFDs let you go long or short on assets (like FX, indices, or commodities) without taking ownership.
Underlying Asset: This is the real asset on which a CFD is based. The CFD’s price mirrors the price of the underlying asset. For instance, a CFD on Apple stock tracks Apple’s share price. You don’t own the underlying Apple shares in a CFD trade, but your profit or loss is determined by how the Apple stock price moves. The underlying asset could be a stock, currency pair, commodity, index, or any instrument the CFD is derived from.
Long Position (Buy): “Going long” means you buy a CFD because you expect the price of the underlying asset to rise. If the price goes up, you can later sell the CFD at a higher price and profit from the difference. In simple terms, you’re betting on a price increase. For example, if you go long on an oil CFD at $70 and oil’s price rises to $75, you could close the trade for a profit of $5 per unit (minus any costs). Long = buy low, sell high (hoping for a rise).
Short Position (Sell): “Going short” means you sell a CFD first because you expect the price to fall. Here, you profit if the underlying asset’s price drops. After selling, you would later buy the CFD back at a lower price to close the trade, keeping the difference as profit. For example, you short a CFD on gold at $1,950; if gold falls to $1,900, you can buy it back cheaper and profit $50 per unit. Short = sell high, buy back lower (profiting from a decline). In CFD trading, you can short an asset just as easily as going long – there’s no need to actually own the asset beforehand.
Leverage: Leverage means using a small amount of capital to control a larger trading position. CFDs are leveraged products, so you only need to deposit a fraction of the trade’s total value to open a position. This amplifies both potential gains and losses.
Margin: Margin is the amount of money you must put down as a “good faith” deposit to open and maintain a leveraged position. It’s essentially the portion of the trade value you provide, with your broker effectively lending you the rest. Think of margin as the collateral for your leveraged trade. For example, if a CFD requires 5% margin, and you want to trade £10,000 worth of an asset, you’d need to deposit £500 as margin. Margin is not a fee – it’s still your money, but it’s locked up to support the open trade. As the trade moves, your broker uses your margin to cover potential losses. Trading on margin lets you take larger positions than your cash alone would allow.
Margin Call: A margin call is a warning from your broker that your account equity (the value of your funds plus/minus any open trade P/L) has fallen too low relative to your used margin. It typically means you’re in danger of your positions being forcibly closed to limit further losses. In practice, if the market moves against you and your losses approach the amount of your deposited margin, the broker will alert you (the “margin call”) that you need to deposit more funds or close some positions. For example, if you have £500 margin posted and your open trades are incurring losses that bring your remaining account equity down to £500 (or whatever threshold the broker sets), you’d get a margin call. If you don’t act (add money or reduce exposure), the broker may start closing your positions to protect against going negative. A margin call is essentially: “You’re running low on funds – top up or we’ll have to liquidate some trades.”
Stop Out (Liquidation): If your account continues to lose value and hits the broker’s stop out level (a critical percentage of margin, often 50%), the broker will automatically close one or more of your positions to reduce risk. This is done to prevent further losses beyond your account balance. In short, a stop out is when the system starts closing your trades because you didn’t meet a margin call. Avoiding this scenario is key – use stop-loss orders and keep an eye on your free margin (the money available beyond what’s tied up in margin) to cushion against market swings.
Order Types and Execution
Market Order: A market order is an instruction to buy or sell immediately at the best available current price. This is the simplest order type – you’re basically saying “execute my trade now at whatever the market price is.” Market orders give you speed but not price guarantee. For example, if gold is around $1900 and you place a market buy, you’ll get filled at the current ask price (maybe $1900.50). Market orders are great for quick entry/exit, but be mindful of potential slippage (explained below) in fast-moving markets.
Limit Order: A limit order lets you set a specific price at which you want to buy or sell. The trade will only execute if the market reaches your chosen price (or better). In other words, you set the maximum you’ll pay when buying, or the minimum you’ll accept when selling. For example, if EUR/USD is 1.1050 and you want to buy lower, you could place a buy limit at 1.1000 – if the price dips to 1.1000, your order executes (you get that price or potentially slightly better). Limit orders give you price control, but there’s no guarantee your order will get filled as the market might never hit your price. Traders often use limit orders to enter trades at a preferred price or to take profit at a target level.
Stop (Entry) Order: (Not to be confused with stop-loss). A stop entry order is an order to buy above the current price or sell below the current price – it triggers only if the market price crosses a certain level. This might sound counterintuitive (why buy higher or sell lower?), but it’s useful for trading breakouts. For instance, if gold is at $1900 and you suspect it’ll rally if it breaks above $1920, you could place a buy stop order at $1920.1. If gold’s ask price hits $1920.10, the order activates and buys at market, hopefully capturing the upward momentum. Similarly, a sell stop order can be set below the market to catch a downward breakout. Stop orders are pending orders that execute only after a certain price is passed, ensuring you enter only when the market shows strength (up or down). Just note that, like market orders, stop orders can experience slippage if the market moves fast once the trigger price is reached.
Order Execution (Execution): In trading, execution refers to the process of completing your order and filling the trade. When you click “Buy” or “Sell,” your order is sent to the market (or broker’s system) to be executed. A successful execution means your trade is now active at a certain price. Execution can be manual or electronic, but with modern CFD platforms it’s usually instantaneous and electronic. The key point is that execution is about how your buy/sell order gets filled. For example, if you place a market order to buy a stock CFD, the platform will execute it by matching you with a seller at the current ask price. Fast execution is crucial in CFD trading, especially in volatile markets, to ensure you get the price close to what you clicked. All brokers strive for best execution, meaning getting you the best available price at that moment. When you hear “good execution” or “order executed,” it just means the trade was carried out (you’re in or out of the market as intended).
Slippage: Slippage is the difference between the price you expect and the price you actually get when your order executes. It happens most often in fast-moving or thinly traded markets. For example, say a forex pair is very volatile: you place a market buy expecting a price of 1.2000, but by the time the order fills, the best price available is 1.2010 – that 0.0010 difference is slippage (in this case 10 “pips,” explained later). Slippage can be negative or positive: sometimes you get a worse price than expected (negative slippage, e.g. your buy order fills higher, or your sell order fills lower), and occasionally you might get a better price than expected (positive slippage). High liquidity and using limit orders can reduce slippage. But when markets are highly volatile (like during major news events), even stop-loss orders can slip – meaning your stop might execute at a different price if the market gaps. For instance, if you set a stop-loss at 100 on a stock but news causes it to open at 95 the next day, your trade may close around 95 (slipped past your level). Quick tip: To avoid negative slippage, you can use limit orders for entries/exits; the trade-off is you may miss the trade if price skips over your limit.
Take-Profit Order: A take-profit order automatically closes your position when the price reaches a preset profit target. It’s basically the opposite of a stop-loss – instead of limiting loss, it secures a profit. You set a level above the current price for a long trade (or below current price for a short trade), and if the market hits that level, the platform takes your profit by closing the trade. Example: You buy a CFD at $50 and set a take-profit at $55. If the price rises to $55, your position will close and lock in that $5 profit. For beginners, using take-profits is a good way to stick to a plan and secure gains.
Stop-Loss Order: A stop-loss order is a critical risk-management tool that automatically closes your trade if the market moves against you to a certain price. It’s designed to limit how much you can lose on that trade, hence the name “stop loss” – it stops further losses beyond the level you set. For example, if you buy a CFD at 100, you might set a stop-loss at 95. If the price drops to 95, the position will be closed, capping your loss at about $5 per unit (plus any slippage). Using stop-loss orders is crucial for protecting your capital. They let you define the maximum risk on a trade. In practice, you place a stop-loss below your entry price on a long position, or above your entry on a short position. This way, if the market goes the wrong way, you exit automatically. Do note that a normal stop-loss isn’t a 100% guarantee; if the price gaps through your level (jumps from one price to another skipping your exact stop), you could be filled at the next available price (that’s slippage). Stop-losses work well for typical market movements. Always plan your stop when entering a trade – it’s like setting a floor on potential losses.
Example (Stop-Loss in action): You go long EUR/USD at 1.2000, anticipating a rise. To manage risk, you set a stop-loss at 1.1950 (50 pips below). The market indeed falls due to unexpected news and hits 1.1950 – your stop-loss triggers and closes your trade, limiting your loss to ~50 pips. Yes, you took a loss, but without the stop, you might still be in a falling market with growing losses. In this way, the stop-loss acted like a safety net, letting you “live to trade another day.” As a trader, you’ll hear the mantra: never trade without a stop-loss. It’s there to protect you when the market moves against your position, especially if you’re not watching 24/7. As trader’s get more experienced, they learn where to place stop-loss orders in accordance with their own risk management rules.
Trading Costs and Calculations
Bid Price: The bid is the price at which you can sell the CFD (and at which the market is buying from you). On your platform you usually see quotes as two numbers; the left (lower) number is the bid. For example, if you see EUR/USD = 1.2345 / 1.2348, the bid is 1.2345. If you want to sell (go short) immediately, you’ll get filled at 1.2345. The bid is always a bit lower than the ask price. Another way to remember: bid = price buyers bid for the asset. If you’re closing a long position, you’ll generally do so at the bid price.
Ask Price: The ask (or offer) is the price at which you can buy the CFD (the price sellers are asking). It’s the right (higher) number in a quote. In the above EUR/USD example 1.2345 / 1.2348, the ask is 1.2348. If you want to buy (go long) immediately, you’ll pay 1.2348 per unit. Think of the ask as the price the market is “asking” from buyers. When you close a short position, you do so at the ask price. The ask is always a bit higher than the bid.
Spread: The spread is the difference between the ask price and the bid price. It’s one of the main costs of trading CFDs. Instead of paying a direct fee to open a trade, brokers often make money through this small price gap. For example, if a stock CFD is quoted $100.50 (bid) / $100.70 (ask), the spread is $0.20. The market needs to move at least that much in your favor for you to break even. Tighter (smaller) spreads are better for traders, because it means lower cost to enter/exit. Spreads can vary by asset and market conditions – highly liquid markets like major forex pairs often have very low spreads (e.g. 0.0001 in EUR/USD, which is 1 pip), whereas exotic or volatile instruments can have wider spreads. In our EUR/USD example 1.2345/1.2348, the spread is 0.0003 (3 pips). If you buy at 1.2348, the moment you enter you could only sell at 1.2345, so you’d start with a -3 pip loss. The price needs to rise by >3 pips for your position to turn profitable. Spread is essentially the price of doing business in CFD trading – always consider it when planning entries and exits.Traders want tight spreads, as wide spreads mean you pay more to open a trade.
Pips and Points: These are units to measure price movement. A pip (percentage in point) is a common term in forex trading – it’s typically the smallest increment a currency price can move, usually 0.0001 for most pairs. For example, if GBP/USD moves from 1.2545 to 1.2546, that’s a move of 1 pip. An exception is currency pairs involving the Japanese yen which are quoted to two decimal places, so 0.01 is 1 pip inUSD/JPY. In CFD trading, you might also hear points, which is often used for indices or shares. A “point” usually means 1 unit of the asset’s price (e.g. 1 point in the S&P 500 index). Sometimes pip and point are used interchangeably, but context matters – with forex CFDs, people say pips; with index or stock CFDs, they might say points or ticks. The main idea: these terms help describe price changes. If a trader says “I made 50 pips on that trade,” they mean the price moved 50 increments in their favor. Knowing the pip/point value is important for understanding profit/loss. For instance, if you trade 1 lot of EUR/USD, 1 pip is typically $10 (because 1 lot is 100,000 units; 0.0001 of 100,000 EUR = 10 USD). If you trade 1 CFD on the FTSE 100 index, 1 point movement might equal £1 profit/loss, depending on contract specifications. Your platform will usually calculate the P/L for you, but knowing these units is part of the lingo.
Lot (Position Size): A lot is a standardized unit of trading volume. In other words, it’s the size of your trade. Different markets have different standard lot sizes. In forex, 1 standard lot = 100,000 units of currency. But CFD brokers often allow mini lots (0.1 lot = 10,000 units) or micro lots (0.01 lot = 1,000 units) for trading flexibility and increased accessibility. For share CFDs, 1 CFD usually represents 1 share (so if you buy 100 CFDs of Apple, you control 100 Apple shares worth of exposure). For index CFDs or commodity CFDs, the contract size can vary – e.g. 1 lot of a crude oil CFD might be 100 barrels. Key point: The lot size tells you how much of the underlying asset you’re controlling per contract If you open 0.5 lots on EUR/USD, that’s EUR 50,000; if you open 2 lots, that’s EUR 200,000 EUR, etc. New traders should start with small lot sizes to manage risk. Many platforms let you trade very small positions (like 0.01 lot) so you can learn without taking on a lot of risk. Always be aware of how big your position is relative to your account – a common beginner mistake is accidentally trading too large a size because “1” lot might not sound like much, but it could be a large notional value.
Commission: Some CFD brokers charge a separate commission fee on trades (especially for stock CFDs). This is a fixed fee or percentage per trade on top of the spread. For example, a broker might offer very tight spreads on stock CFDs but charge $5 commission per trade. Or they might say “$0 commission” but have a slightly wider spread. It’s just another way trading costs can be structured. Always check your broker’s fee schedule. If there’s a commission, factor it into your trade profits/losses. Many brokers advertise zero commission (making money only from the spread), but for certain assets (like shares) they might still have a commission due to the way those trades are executed. Bottom line: spread and commissions are the two main costs to watch.
Overnight Financing (Swap): If you hold a CFD position overnight (past the market’s close time or 5pm New York for forex), you’ll likely pay or earn a small fee called a swap or overnight financing. CFDs are leveraged, so effectively you’re borrowing funds to hold the full position. The broker will charge interest on that borrowed portion. If you’re long, you typically pay interest (if the asset’s currency interest rate is higher than the counter currency you might pay a bit more, etc.), and if you’re short, you might receive interest (if borrowing the asset yields something). In practice, many brokers simply have a nightly charge or credit based on the instrument’s interest rate differentials or a baseline rate. For example, if you are long a stock index CFD, you might pay an annualized X%/365 per day. If you are short it, you might receive a small amount (or also pay less interest, depending on rates). This is usually small, but over time it adds up, so don’t ignore overnight fees if you plan to hold trades long-term. Some brokers clearly show the daily swap rates on their platform. An example: you are long1 lot of EUR/USD overnight. If the EUR interest rate is higher than USD, you might earn a tiny swap; if lower, you pay a tiny swap. Many newbies are surprised when they see a “swap charge” on their account after holding a trade for days – it’s normal, as it’s just the cost of leveraged overnight positions.
Risk Management and Account Terms
Drawdown: In trading, drawdown refers to the decline of your trading account from a peak value to a low point. It’s usually expressed as a percentage drop. For example, if your account grew to £5,000 and then a series of losses brought it down to £4,000, that’s a £1,000 drawdown, which is a 20% drawdown from the peak. Drawdown measures the severity of a losing period. All traders experience drawdowns – the key is to keep them at tolerable levels. A 10% drawdown might be easy to recover (you need about an 11% gain to get back to even), but a 50% drawdown is very hard to recover (you need a 100% gain to restore the account). As a CFD trader, you should pay attention to drawdown because it tells you about risk management effectiveness. If someone says “my max drawdown was 15%,” it means at worst their account fell 15% from a high before recovering. Beginners should aim to keep drawdowns small by not risking too much on any single trade. Quick example: You start with $1,000, make some trades and reach $1,200. Then you hit a rough patch and your balance goes down to $1,100. That’s a $100 drop from the peak $1,200, which is an 8.3% drawdown. If you then recover to new highs, that drawdown is in the past. However, if you kept losing to $800, that’s a $400 drop from $1,200 = 33% drawdown. It’s a sign you should adjust your strategy or risk per trade. Monitoring drawdown helps you understand and control trading risk over time.
Volatility: Volatility refers to how much and how quickly the price of an asset moves. High volatility means the price swings are large and happen rapidly, while low volatility means the price is relatively stable or moves in smaller increments. For example, a highly volatile stock might move 5-10% in a day, whereas a low-volatility stock might only move 0.5% in the same period. Traders often like volatility because it provides opportunity (prices are moving, so there’s a chance to profit), but it also means higher risk (things can change quickly against you). In CFD trading, certain markets are known to be more volatile (cryptocurrencies or tech stocks) and others more stable (major forex pairs or large indices usually have steadier moves in percentage terms). Important: Adjust your position sizes in highly volatile markets – what might be a safe stop-loss distance in a calm market could be too tight in a volatile one. Tools like the VIX index (for stock markets) measure volatility. But practically, you’ll get an understanding about market moves: if EUR/USD barely moves 30 pips a day (low vol) and Bitcoin moves hundreds of dollars a day (high vol), you know which is more volatile. High volatility = bigger potential profit and bigger potential loss. Always approach volatile markets with a clear plan (and likely a stop-loss in place).
Liquidity: Liquidity describes how easily you can buy or sell an asset without significantly affecting its price. A market with high liquidity has lots of trading activity (many buyers and sellers), so you can execute trades quickly at or close to the market price. A low liquidity (illiquid) market has fewer participants, so large orders can move the price, or you might struggle to find a counterparty to fill your trade. For example, major forex pairs like EUR/USD are extremely liquid – you can trade millions and barely move the price, spreads are tiny. But a small-cap stock CFD or an exotic currency pair might be illiquid – the spread could be wide and slippage more likely. Why it matters: Trading highly liquid markets generally means lower transaction costs (tight spreads) and easier trade execution. In illiquid markets, you might face wider spreads and slippage. That means the price will typically have to move more for you to break-even. As a beginner, it’s wise to stick to more liquid markets until you understand how liquidity impacts trading. You can usually gauge liquidity by looking at the spread and the speed of execution – tight spreads and instant fills imply good liquidity. If you see a CFD with a very large spread or difficulty entering/exiting, it could be due to lower liquidity.
Equity (Account Equity): Your account equity is the current value of your trading account, factoring in all open positions. It’s calculated as: Equity = Balance + Current Profit/Loss of open trades.. If you have trades open, equity fluctuates in real-time with your trades’ P/L. For instance, you deposited £1000 (that’s your balance). You open a trade that is currently £50 in profit – your balance is still £1000 (it only changes when trades are closed), but your equity is £1050. If instead the trade was £50 in loss, equity would be £950. Equity matters for margin calculations – brokers use your equity to determine if you meet margin requirements (for margin calls, etc.). Always keep an eye on equity, not just balance, because equity tells you the true real-time value of your account.
Balance: Your account balance is the amount of money in your account excluding open trades (only settled funds). It updates when you close trades or if you deposit/withdraw. Using the above example: you deposit £1000, so your balance = £1000. You then open a trade but floating P/L doesn’t change your balance. If you close that trade with £50 profit, then the profit is added to balance, making it £1050. Conversely, a closed loss is deducted from balance. Why the distinction? Because you might see equity moving up and down all day, but your balance only changes after realizing (closing) profits or losses. If all trades are closed, balance and equity become the same.
Free Margin: Free margin (or “available margin”) is how much of your funds are available to open new trades or to withstand losses on current trades. It’s calculated as Equity – Used Margin. For example, if your equity is $1000 and $200 is tied up as margin for open trades, your free margin is $800. That $800 can be used to open more positions or simply acts as a buffer if your current trades go into loss. If your free margin drops to zero, it means all your equity is being used to maintain existing positions – you’re maxed out, and even a slight adverse move could trigger a margin call. It’s a good habit to keep some free margin rather than using all available funds for margin; this gives your trades breathing room.
Risk-Reward Ratio: Although not a platform term, you’ll encounter this concept often. It’s the ratio of how much you’re risking on a trade to how much you aim to gain. For instance, if your stop-loss is 50 pips and your take-profit is 100 pips away, that’s a 1:2 risk-reward (risking 1 part to potentially make 2 parts reward). Traders often strive for a favorable risk-reward ratio (like 1:2 or 1:3) on each trade, meaning the potential profit outweighs the potential loss. This way, even if only half or a third of their trades are winners, they can still be net profitable. As a beginner, thinking in terms of risk-reward can help you plan better trades. Before entering, know where your stop and target might be – if you’re risking $50 for a likely profit of $50, that’s 1:1, you’ll need a high win rate to succeed. If you’re risking $50 to try for $150, that’s 1:3, which is more attractive (you could be wrong more often and still make money overall). Use stop-loss and take-profit orders to define your risk-reward on each trade.
FAQs
What is a CFD and how is it different from buying the actual asset?
A CFD (Contract for Difference) is a derivative contract where you trade based on price movements of an asset without owning it. Unlike buying actual stocks or commodities, with a CFD you don’t take possession of anything – you’re simply speculating on price changes. The benefit is you can go long or short and use leverage. The downside is you have to pay spreads (and possibly overnight fees) and manage margin. Essentially, CFDs mirror the asset’s price, but you never actually own the underlying asset.
How does leverage work in CFD trading?
Leverage allows you to control a large position with a smaller amount of money. For example, 10:1 leverage means you only need 10% of the trade value as margin. If you wanted to buy $10,000 of gold with 10:1 leverage, you’d put up $1,000 and the broker lends the rest . Leverage can amplify profits and losses. A 1% move on a $10,000 position is $100 – that’s a 10% change on your $1,000 margin. So leverage boosts your exposure. But it’s a double-edged sword: great when you’re right, painful when you’re wrong. Always use leverage cautiously and understand that high leverage = high risk.
What’s the difference between margin and leverage?
They’re closely related. Leverage is the ratio of total position size to your own money used (e.g. 10:1). Margin is the actual amount of your money required to open a trade. Think of leverage as the multiplier, and margin as the portion of the trade you’re funding. For instance, 50:1 leverage corresponds to a 2% margin requirement. If you have a $1000 position, 2% margin is $20 – that’s what you must deposit to hold a $1000 position (hence 50:1 leverage). In short: leverage is the power, margin is the money down. You use margin to get leverage.
What happens if I get a margin call?
A margin call means your account equity has fallen too low relative to the margin in use. It’s a warning. If you get a margin call, you should act quickly: either deposit more funds to boost your equity, or close some positions to reduce margin usage. If you do nothing and losses continue, the broker may start closing your positions automatically (this is a“stop out” or liquidation). Essentially, a margin call is your broker saying “You’re about to run out of usable funds; add money or we’ll cut your positions.” To avoid margin calls, keep an eye on your margin level (%) and don’t over-leverage your account. Using stop-losses can also prevent small losses from snowballing into a margin call scenario.
How do stop-loss orders protect me?
A stop-loss order automatically closes your trade at a predefined price to cap your loss. It’s your safety net. For example, you buy a CFD at $100 and set a stop-loss at $95. If the price drops to $95, the trade will exit, limiting your loss to ~$5 per share. This protects you from the position potentially falling to $90, $80, etc. Stop-losses take the emotional decision out of exiting a position – you don’t have to manually close the trade; it happens for you, even if you’re away from the screen. Importantly, in very volatile markets a normal stop-loss might not fill at exactly $95 (if the price gaps down suddenly, you could get closed at $94, for example – that’s slippage). But in most cases, stop-losses work as intended and are free to use. They are crucial for risk management. Every trade should have a stop in place, so you know the worst-case loss upfront.
What’s the difference between a stop-loss and a take-profit?
Both are exit orders, but one is for managing a losing trade and the other is for locking in gains. A stop-loss closes your trade to prevent further losses once a price goes against you. A take-profit closes your trade to secure profit once a price goes in your favor to a target. For example, you go long at 50, set stop-loss at 45 (risking 5) and take-profit at 60 (aiming to make 10). If the price drops to 45, your stop-loss kicks in, you exit the trade and you lose $5/share. But if the price had risen to 60, your take-profit kicks in and you gain $10/share.
What does the “spread” mean for me as a trader?
The spread is the built-in cost you pay on every trade – it’s the gap between the buy and sell price. When you enter a trade, you start in the red because of the spread. For instance, if a stock CFD is $100 bid / $101 ask, and you buy at $101, you could only immediately sell at $100 – so you’d be at a $1 loss per share initially (that’s the spread cost). A tighter spread (say $100 / $100.05) means a much smaller initial cost than a wide spread ($100 / $101). So as a trader, you want low spreads, especially if you trade frequently or short-term. High spreads can eat into your profits or make it harder for a trade to become profitable. The good news is popular markets like major forex pairs, US indices, large-cap stocks, often have tight spreads due to high liquidity. Always be aware of the spread when you open a trade – it’s why your platform might show a negative P/L right after opening; you need the price to move beyond the spread in your favor to get into profit.
Why did my trade execute at a different price than I clicked?
This is likely due to slippage. Slippage occurs when the market price changes between the time you place your order and the time it’s executed. It’s common in fast-moving markets or if you place large orders when volume is low. For example, you click to buy at 1.3000, but there was a sudden burst of activity and your order actually gets filled at 1.3005. That 5-pip difference is slippage. It can happen on stop-loss orders too – you set a stop at a certain level, but if the price gaps, you might get a fill beyond your stop. Slippage can be positive (better price) or negative (worse price), but traders mostly notice the negative kind! To minimize slippage, trade during active hours, avoid major risk events with market orders, or use limit orders (which won’t execute at a worse price than you set, though they might not execute at all if price jumps over your limit).
What does going “long” or “short” mean?
Going long means buying, or taking a position expecting the price to rise. Going short means selling first (short selling), expecting the price to fall. With CFDs, when you short you’re essentially borrowing the asset to sell now and hoping to buy it back cheaper later. If you’re long, you profit from upward moves; if you’re short, you profit from downward moves. It’s just trader jargon: long = bullish, short = bearish. One of the advantages of CFDs is that shorting is straightforward – you can short most instruments with a click, allowing you to potentially profit in falling markets, which you can’t do if you only owned the physical asset.
What is a pip and why does it matter?
A pip is typically the smallest price increment in forex pairs (usually 0.0001 for non-Yen pairs). It matters because traders often quote profit/loss or risk in pips. For instance, “I made 50 pips on that trade” or “My stop is 20 pips away.” It’s a universal way to discuss how far the price moved. On USD/JPY, a pip is 0.01 (because of different decimal convention). Some brokers use fractional pips (like quoting EUR/USD to 5 decimal places, where the last is a fractional pip or “pipette”). For non-forex CFDs, you might hear “points” instead (e.g. gold went up 5 points, or the S&P 500 index fell 20 points). Knowing what a pip/point is helps you calculate your P/L. If you know how many pips you made and the value per pip for your position, you can figure out the profit. For example, 10 pips profit on a 0.1 lot EUR/USD trade is $10 (since ~ $1 per pip for 0.1 lot). Bottom line: pips/points are the language of price movement – get familiar with them in the markets you trade.
How do I determine my position size or number of lots?
Position size (number of lots or contracts) determines how much of the asset you’re trading and directly affects your profit/loss per price movement. To choose it, you should consider how much money you’re willing to risk on the trade and how far away your stop-loss is. A common approach is to decide your risk in dollar terms(say $50 risk per trade, which might be 5% of a $1000 account). If your stop-loss is 50 pips away, and you want that to equal $50, then you need a position where 50 pips = $50. On a standard lot of EUR/USD, 50 pips would be $500 (since ~ $10/pip * 50). On a 0.1 lot, 50 pips ≈ $50 (since ~$1/pip * 50). So a 0.1 lot position would fit the risk. Many trading platforms have built-in calculators or you can do the math: Pip value x Pips at risk x lots = $ risk. For stock CFDs, consider how many shares (CFDs) to trade given your risk per share. Start small to see how lot sizes impact your P/L. It’s better to be cautious than accidentally trade a size that’s too big for your account. Over time, position sizing will become second nature as you balance your risk and desired exposure.
Why did I get charged overnight fees on my CFD trade?
If you held a CFD position overnight, the broker likely charged (or paid) you a swap/overnight financing fee. This fee reflects the cost of leverage. When you hold a leveraged position, it’s as if the broker lent you money to control the full position; the overnight fee is basically interest on that loan. It’s usually a small percentage, calculated daily. For long positions, you typically pay; for shorts, sometimes you receive (depending on interest rates of the underlying asset/currency). Check your broker’s info: they often list daily swap rates. If you see a small deduction or addition on your account each day you hold a trade, that’s what it is. It’s not a fee for nothing – it’s the financing cost of keeping the trade open past the trading day. Note that some brokers don’t charge overnight on certain products for the first couple days (for instance, stock CFDs might reflect actual 2-day settlement), but in general, expect an overnight fee for any multi-day holding of CFD positions.
What is drawdown and should I be worried about it?
Drawdown is the reduction from your account’s peak value during a losing streak. For example, if you grew $1,000 to $1,200, then dropped to $1,100, you had a $100 drawdown (about 8.3%). It’s a normal part of trading – no strategy wins 100% of the time. You should be aware of it because large drawdowns are hard to recover from. If you lose 50% of your account, you need a 100% gain to bounce back to break-even. So try to keep drawdowns to reasonable levels (through proper risk management and not over-leveraging). Many traders set a “max drawdown” they’re comfortable with (say 20%). If they hit that, they stop trading and re-evaluate. As a beginner, track your drawdowns: it can reveal if you’re risking too much or if your strategy has flaws. But don’t panic over a small drawdown; even the best traders have losing periods. Use it as feedback to improve risk control.
Why is volatility important in trading?
Volatility is basically how lively or tame a market is. In a volatile market, prices move a lot and quickly – offering chances for bigger profits, but also bigger losses if you’re on the wrong side. In a low-volatility market, price changes are small and slow – which might be safer but also harder to profit from short-term. Volatility matters because it influences your strategy: for instance, you might use wider stop-losses in a volatile market to avoid getting stopped out by normal swings, and you might take profits quicker in a volatile market because things reverse fast. Also, certain strategies thrive in volatility (scalping or breakout trading), while others prefer calm trending markets. You should adjust your expectations to the volatility: don’t expect a sleepy forex pair to give you 100 pips a day (unless something big happens), and conversely, don’t be shocked if a cryptocurrency moves 5% in an hour – that’s volatility at play. Many traders watch volatility indicators (like ATR – Average True Range, or the VIX for equities) to gauge how much an asset typically moves and plan accordingly. In summary: volatility = opportunity + risk. Always balance the two.
Do I need to pay attention to liquidity?
Yes, especially when choosing what to trade or when trading larger sizes. Liquidity affects how easily and cheaply you can get in and out of trades. High liquidity (like major FX pairs, big stocks, indices) usually means you’ll get near-instant execution and tight spreads – good for you. Low liquidity (penny stocks, exotic forex pairs) can mean slippage, delays, or not getting filled at your desired price. As a beginner with small trade sizes, liquidity might not hurt you too much, but it’s still wise to start with mainstream, liquid markets. If you try to trade a less liquid market, use caution: set limit orders to control price, and be prepared for wider spreads. Also, around market opening/closing times or big news, even liquid markets can see liquidity dry up briefly – spreads widen, etc. So, liquidity is like the grease in the market’s engine; when it’s plentiful, everything runs smoothly for your trades. When it’s scarce, things can get bumpy. Stick to instruments with good liquidity and you’ll have one less thing to worry about.