CFD Trading Guide 2023

If you are a beginner and are looking for something that will give you great returns without investing a lot, CFDs can be a great option. With this, you can own a contract that allows you to speculate on the price of a company, much like stocks.

This guide will explain the best strategies and the best platforms for CFD trading in the United States.

What Is CFD Trading?

In simple phrases, it is a method of trading derivatives. Instead of trading an asset, you are trading a contract whose value is directly related to the asset’s value. This means that you are not buying shares but buying contracts whose value depends on the value of the corresponding shares.

CDF trading is quite simple, even if the person is a beginner. As mentioned above, CFDs are directly related to stocks, which means trading them is very similar to trading stocks. So, for example, if a stock goes up in price, the value of the CFDs contract will go up by the same value.

CFD trading offers many benefits, one of which can trade using any financial item with CFDs. For example, you can trade stocks, commodities, exchange-traded funds (ETFs), currencies, and cryptocurrencies.

Let’s take an example to understand it better. Suppose you want to buy a stock of coffee. For this example, we will use Starbucks; this company has a value of a share of 50 dollars, and therefore your preferred broker offers a margin of close to 10%. This means that you can buy a share for 10 dollars; your broker lends you the rest, which would be 40 dollars. The stock rises to $60, and you decide to close your position, then you return the borrowed $40, recover your initial investment and earn $10, which means you earn double your investment.

 What Can You Trade With CFDs?

As mentioned above, CFDs can be used to trade any type of financial asset. Among the best-known CFDs are:

• Stocks
• Commodities
• Indices
• Cryptocurrencies

It is possible to trade CSDs using the best brokers in the market. However, it would help if you always kept in mind that the value of the CFD will always be related to the value of the digital asset. So if your asset, for example, a sugar stock, goes up 5%, the CFD value of the share will go up the same. The same goes for commodities, cryptocurrencies, or any other digital asset you want to trade with CFDs.

It should be noted that many traders choose to start their business with instruments that they have mastered or about which they can easily obtain information. More experienced traders sometimes diversify their investment portfolios to maximize their trading potential and improve risk management.

Why Trade CFDs?

Given that it is feasible to buy stocks and other assets outright, why use CFDs? Various fundamental benefits explain the popularity of online CFD trading.

Asset Ownership

With CFDs, you are not the asset owner, as the share certificates are held digitally in an account where the shares can be traded, so you do not need to intervene to buy and sell them.

You do not necessarily have to be the owner of a currency. Still, you have to convert the dollar into another currency, which can sometimes cause you to lose money in commissions and learn about regulations and financial institutions.

With CFDs, it is not essential to be aware of all these aspects, as you are the owner of the contract and can always benefit from changes in the asset.

Leverage

Leverage is the reason why CFDs are so famous today. It consists of you paying only a percentage of the total price of an asset. This is called margin, while your broker lends you the remaining value.

For beginners, when you make a relationship between leverage and margin, both refer to opening a larger position than you have the capital to do so. To explain it better, the margin is usually written in % and leverage in ratio, for example, 1:20. Now, let’s think that a Facebook share is worth $200. If your broker recommends you a CFD with a leverage of 1:20, you have to pay one-twentieth of the total price: 200 divided by 20 is also 10 dollars.

If leverage is employed, it is possible to maximize potentially multiply the profits from the successful trades. Furthermore, since less money is needed for each trade, it is possible to diversify your trades without putting more money in your account.

Diversity Of Trading Options

Brokers today offer CFDs on stocks, indices, treasuries, currencies, sectors, and commodities. This makes it possible for investors interested in various financial vehicles to trade CFDs as an exchange option.

Possibility Of Long-term Trading

If you are looking to invest over a long period, CFDs can be a good option as they do not have an exact expiration date, which allows positions to be held over long periods.

However, it is crucial to keep in mind the interest and maintenance fees because if you have these costs foreseen from the beginning, you can make a better profit.

They Can Be Used In Any Type Of Market

Since you and your broker have a contract on the asset “found in the market,” it does not matter what the asset is. In other terms, you can trade in a whole range of markets using the same format. There is no need to learn new skills if you switch from trading stock CFDs to cryptocurrency CFDs. The fundamental concepts remain the same.

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

CFD Trading Fees

CFD trading fees sometimes include a commission, a financial cost in certain cases, and a spread, i.e., the difference between the bid price and the asking price.

As a general rule, there is no commission for trading commodities and currency pairs. In contrast, some brokers usually charge a commission for stocks.

As far as the opening and closing operations are concerned, we must say that they are two completely different operations, so your broker may charge a commission for each trade.

In this article, we had already mentioned that the long position is an important benefit offered by CFDs. However, it is necessary to consider that a financing charge may be applied because overnight product positions are estimated as an investment. So, traders usually charge interest depending on the position’s days.

Risks Of CFD Trading

When it comes to any investment, risk will always be present. Therefore, it is important to understand the different risk factors related to CFD.

Any Investment Is A Risk

The first thing to say is that it is a derivative. This means that the investment or product is detached from a background asset, whether a cryptocurrency or a stock.

Since it is a derivative, it has no backing. That is why important that it may require you to perform prior research of the company issuing the CFD to determine the trustworthiness.

Trading With Leverage

On the other hand, leverage can prove to be a useful tool to speed up setting up an account, although it may destroy your portfolio, which would cause you to stay at the starting point. This is why it is extraordinarily necessary to ensure sufficient funds for when you trade CFD leverage. This covers a potential loss since it may be greater than the starting investment.

Financial Strength

This is essential because if you buy a CFD and the company did not pay or went bankrupt, there is nothing to back you up.

As it is a product derivative, a CFD has nothing to back the product. So again, it is important to do your examination before making any move that could be considered an investment.

Best CFD Trading Strategies

The most important thing to having the best trading strategies is a clear plan for each trade.

Seeking to help you get started with the best strategies, we are going to explore some of the most famous CFD strategies:

Breakout Trades

To locate the breakouts, you must identify the resistance zones. With that, you identify the area where a stock has not been able to break out. Then when the stock breaks through that resistance, it will rise continuously.

The important thing here is not to fall into false breakouts. Instead, it is relevant to use technical analysis to identify different factors such as momentum, which work to identify which asset will make an upward movement.

Momentum Trading

This strategy can be very useful for beginners. But, first, you have to quickly analyze and identify which asset or stock is gaining value with a strong volume. Then, as more traders come in, the asset price will rise dramatically. But, when the momentum starts to go down, it is best to sell your position to make a profit.

Normally, momentum is generated by company announcements and news, so it is advisable to keep an eye on the news and keep an eye on the stock.

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Scalping

If you are a day trader, you must already know the scalp. Its objective is to make a large volume with small and profitable stocks to accumulate profits while spreading the risk in a single day. This strategy can be a smart way for beginners to get good daily returns.

To use this technique requires time and dedication to be able to do it manually. However, an option is to use robots and previously programmed algorithms and execute positions at specific points.

CFD Trading Tips

As we mentioned in the article, everything has its risk, so you must keep in mind some tips below to get the most out of your trades.

The First Thing To Do Is To Use A CFD Demo Account

The best thing you can do to start trading CFDs in the USA is to use a demo account to know how CFD trading works and learn and develop strategies that will allow you to make profits. Best of all, here, you will not be committing your money to trade.

Most of the best platforms in the United States have a demo account. Here you learn what is mentioned above, allowing you to buy and sell CFDs as if they were a real account.

Easy To Enter And Exit Positions

With CFDs, you can place multiple buy orders instead of a single trade. This can be beneficial since most brokers do not charge commissions and also because, this way, you can lower your risk.

This is very beneficial because you can buy more at a lower price if the price goes down after your first purchase. As for selling, you can lock in profits in turn if you continue to hold some CFD contracts to get a better return if the price goes up.

Technical Analysis

It would help if you always used tools to make a technical analysis of stocks, currencies, and other assets. With this analysis, you can get a history of the prices of an asset and use it to make future predictions. It is advisable to use multiple indicators and charts together, as this way, you can have a much broader view and build the best possible trading strategy.

Diversify Your Portfolio

It is always important that you diversify your portfolio. In the case of CFDs, you can have more than one position without putting more money in. This is possible with fractional shares as with fanning.

So then, this is an advantage as you can trade CFDs on shares of companies in different sectors. The more diversified your portfolio is, the more protected you will be if a sector or company loses its value in the market.

Stop-loss Orders

First, we must define what a stop loss is. It means that it is a price below the price that governs the CFD market at which your broker will sell your position. These orders are vital for good risk management. For example, when you set a stop loss, nothing will happen, but if the value of your position decreases, your broker will automatically sell on your behalf and thus limit your losses.

It is also possible to use stop-loss orders to keep some profit. You only need to set your stop loss above what you paid for the CFD.

CFD Trading Tax In The US

CFDs are treated as swap contracts for U.S. tax processing, with the realization method common gain or loss treatment. Therefore, it is not considered a capital gain or loss.

Best CFD Trading Platforms

To start trading CFDs in the United States, you need to create an account with a CFD trading platform. After that, you can decide between many brokers, and they differ greatly in terms of costs, the CFDs they offer you, and the stock trading tools they incorporate. So to help you choose, we’re going to highlight five of our top-rated CFD brokers in the United States.

1. eToro – Overall Best CFD Trading Platform

Our first pick is our preferred CFD broker in the United States. For starters, eToro offers over 450 ETFs. You can trade over 800 stocks and choose to buy stocks directly or trade CFDs.  As mentioned in our guide, you can trade CFDs on currencies, commodities, cryptocurrencies, and indices, which are possible here at eToro. The most important thing about this platform is that it is commission-free and only charges spread with values well below the rest of the market.

Another relevant aspect is its trading platform. One feature that can be attractive, especially for beginners, is that eToro has its Facebook-style social network, where it is possible to interact with other members and learn from the more experienced ones. One way to learn from those with more experience is to use copy trading and take advantage of its benefits. With this tool, it is possible to copy the positions of more experienced traders automatically.

eToro has a charting platform that is integrated with technical studies. This platform also has a mobile application that can be used for both CFD trading and keeping track of what is going on in the markets.

eToro fees:

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

2. Libertex - CFD Broker With No Spread And Integrated Trading Platform

Currently, the Libertex trading platform has more than 2 million users in 60 countries. CySEC regulates this platform, so your investments are completely safe on this platform. Among the assets that can be traded, we can find CFDs, cryptocurrencies, and stocks.

As for the fees, there are two on the platform. The first one is with opening a position, which involves the payment of a commission per transaction. This may differ depending on the asset and the amount of the operation. Second, as already mentioned, CFDs can be traded here. In this platform, a spread must be paid, which is the difference between the purchase price and sale of the asset. The spreads for CFDs are between 0.1% - 0.2%. As for leverage, the platform offers up to 1:30, ensuring that profits can increase.

Libertex allows clients to deposit as low as $100, where the options for deposit methods can be with debit and credit cards, bank transfers, or e-wallets.

Both the website and mobile app provide full functionality for MT4 and MT5.

Libertex fees:

Your capital is at risk.

3. Skilling - One Of The Most Common CFD Broker For Beginners

For beginners in the market, Skilling may be familiar. However, this platform stands out for its ease of use, especially when selling and buying products such as CFDs. In addition, the platform has guides and explanatory videos in terms of education, which can be very useful for beginners.

It is a broker fully specialized in CFD. You can buy all kinds of assets. Among the digital assets traded on this platform, you can find stocks, commodities, currencies, indices, and energy ETFs. In addition, Skilling offers leveraged trading in all markets as it is a fully regulated platform by the FCA, FSA, and CySEC.

It is a commission-free platform along with low-cost CFD trading. More advanced traders also use this platform as they can employ the MT4 or cTrader. This platform has sophisticated tools for order and chart analysis. In addition, Skilling has a mobile application available to launch your orders whenever you want.

The minimum deposit for this platform is about £100. You can complete this procedure using a credit or debit card and use a digital wallet. Creating an account here takes a matter of minutes.

Skilling fees:

Your capital is at risk.

4. Oanda - The Best Platform For Use MT4

Oanda offers traders the possibility to have access to a wide variety of instruments such as currencies, indices, and commodities.

The minimum deposit is $1. In addition, this platform offers the possibility to use a demo account, which beginners welcome as they can familiarize themselves with the platform environment and learn about the market. Oanda has more than 100 trading tools, including 71 currency pairs.

FRN and ASIC regulate Oanda. The platform has been operating since 1996 and has offices in the United States and Canada. The platform offers the famous MT4 forex trading platform.

Opening an account here can take about 10 minutes and requires different types of personal information and answering questions to confirm your experience.

Oanda fees:

Your capital is at risk.

5. Trading 212 - The Best Platform For Investing Long Time

Trading 212 may be the best option if you consider yourself a long-term investor. This platform provides the ability to invest in nearly 10,000 markets. This means that you can invest in stocks in the United States, United Kingdom, and Europe.

The most interesting thing about this platform is that it does not charge trading commissions, and you can invest in stocks with 1 dollar. Another highly relevant feature is that it is unnecessary to open an account on this platform to use the demo account. Instead, you only need to download the mobile application and click on the option with the word "demo account." Then, you can start trading stocks, CFDs, commodities, indices, and currencies without putting your money at risk and understanding the market.

This is a platform where no minimum deposit is required. To complete the deposit process can be done in many ways, from debit and credit cards, bank transfers, and e-wallets. Trading 212 is regulated by FCA.

If you determinate to use Trading 212 with real money, you will be glad to know that there is no minimum deposit. Instead, you can fund your account with various payment methods, including debit/credit cards, bank transfers, and e-wallets. Trading 212, which the FCA regulates, also offers CFD markets on stocks, currencies, commodities, and indices.

Trading 212 fees:

Your capital is at risk.

How to Start CFD Trading

Want to start trading CFDs? We'll explain how you can get started with eToro.

Step 1: Register A US CFD Trading Account

To create a new account with eToro, simply go to the broker's home page and click on the "Join Now" button. You will be prompted to create a username and password to access your account. Next, enter some information such as your name, date of birth, email address, and phone number.

eToro also requires you to verify your ID to comply with U.S. regulations. You will need to upload a copy of your driver's license or passport and a copy of a recent utility bill or bank statement.

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Step 2: Fund Your Account

Once your account is set up, you need to deposit funds. eToro requires a minimum deposit of $10, which you can pay using multiple options such as debit card, credit card, and US bank wire transfer, among others.

Step 3: Place A CFD Trade

You are now ready to place your first CFD trade. First, type the name of a stock, currency, ETF, or cryptocurrency into the eToro search area or browse the available assets on your dashboard. Once you have identified the asset you are looking for, press "Trade" and a new order form will open.

Next, enter the amount of money you wish to trade. In addition, you can define a stop loss or take a profit level that allows you to manage the risk of your trade. Finally, if you wish to use leverage in your trade, you can define it here.

Once your order is complete, click "Trade" to begin your CFD position.

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

Conclusion

CFD trading is a way to get good returns on different assets without making large investments. The ease of use is that with CFDs, you don't need to own the asset, and you can increase the position amount using any of the strategies explained in this article.

It is worth mentioning that you should never invest more than you own, as you risk losing everything. That is why it is always advisable to make previous research on the market to make the best decision.

For us, eToro is the best platform to start trading CFDs in the United States. In addition, this platform is commission-free, so don't hesitate and sign up by clicking below to enjoy all the benefits of eToro.

 eToro - Overall Best CFD Trading Platform

67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

FAQs

What is CFD trading?

Contract for Difference (CFD) trading is a method of trading financial instruments that do not involve trading any underlying asset.

Is CFD good for trading?

Day traders find CFDs attractive because they use leverage to trade more expensive assets. However, the lack of regulations, lack of liquidity, and the need to maintain sufficient margins due to leveraged losses can make CFDs quite risky.

Is CFD trading legal in the US?

There are currently restrictions on CFD trading in the U.S., imposed by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). US citizens and residents are subject to the rule, which also applies to foreign and domestic brokers.

How do I start CFD trading?

By registering with one of the platforms previously explained in this guide, you will be able to trade CFDs. We always recommend doing it on a regulated platform.

Can I trade CFDs in eToro?

The answer is yes. You can trade CFDs, stocks, cryptocurrencies, and more.