Trading basics for beginners

What a CFD is

A CFD (contract for difference) is an agreement between you and your broker to settle the difference in an asset’s price between the moment you open a position and the moment you close it. You never own the asset itself. You hold no shares, no gold bar and no bitcoin wallet. You trade the price, and your profit or loss is paid in your account currency.

Because you trade only the price, you can take either side of a market. Going long means you buy because you expect the price to rise. Going short means you sell first because you expect the price to fall, and you buy back later to close. A short position works exactly like a long one in the opposite direction, so it loses money when the price rises.

Through CFDs, one account can give you access to many kinds of markets:

• Forex pairs, such as EUR/USD or USD/JPY
• Stock indices, such as the Nasdaq 100 or the S&P 500
• Metals, such as gold
• Cryptocurrencies, such as bitcoin
• ETFs, which track a basket of assets

CFDs also come with costs and features that owning the asset does not. You pay the spread on every trade, which the next lesson explains. If you keep a position open past the daily rollover, most brokers charge or pay a small overnight financing amount, often called a swap. CFDs are traded on margin, which means you put up only part of the position’s value. That makes them flexible, and it also means losses can grow quickly compared with your deposit.

The rest of this course takes these pieces in order, so that by lesson six you can place a trade with a defined maximum loss.

Prices: bid, ask and the spread

Every CFD has two prices at any moment. The bid is the price at which you can sell. The ask, also called the offer, is the price at which you can buy. The ask is always higher than the bid, and the gap between them is the spread.

When you buy, you open at the ask and later close by selling at the bid. When you sell, you open at the bid and later close by buying at the ask. Either way, a new position starts with a small loss equal to the spread. The price has to move in your favor by at least the spread before the trade breaks even.

For most beginners the spread is the main trading cost, and you pay it on every trade, win or lose. If you trade often with small targets, it takes a large share of each result. A 1-pip spread is 10% of a 10-pip target, but only 2% of a 50-pip target.

Spreads are not fixed. They usually widen when fewer people are trading, for example around the daily rollover, at the weekly open and in quiet holiday sessions. They can also widen sharply in the seconds around major economic releases.

The two prices also matter for stops. A long position is closed at the bid, so its stop loss triggers when the bid reaches your level. A short position is closed at the ask, so its stop loss can trigger when the ask touches your level, even if the bid never gets there.

Some accounts also charge a commission per lot, and positions held overnight pay or receive a swap. Check your account terms for the full cost of a trade.

Pips, lots and what a position is worth

A pip is the standard unit for price moves in forex. For most pairs it is the fourth decimal place, 0.0001. For pairs quoted in Japanese yen, such as USD/JPY, it is the second decimal place, 0.01. Many platforms show one more digit, called a pipette or point, which is one tenth of a pip. In the EUR/USD price 1.08452, the last digit (2) counts pipettes, so a move from 1.08452 to 1.08552 is 10 pips.

Position size in forex is measured in lots:

• 1 standard lot = 100,000 units of the base currency
• 0.1 lot (mini) = 10,000 units
• 0.01 lot (micro) = 1,000 units

For pairs quoted in US dollars, such as EUR/USD, GBP/USD and AUD/USD, one pip is worth $10 per standard lot, $1 per 0.1 lot and $0.10 per 0.01 lot. Pip value grows in direct proportion to size: 0.5 lots means $5 per pip, and 2 lots means $20 per pip.

The full market value of a position is lots × contract size × price. This is the exposure you carry, even though you only put up a fraction of it as margin.

For pairs quoted in other currencies, the pip value is worked out in the quote currency first and then converted. On USD/JPY, one pip on a standard lot is 100,000 × 0.01 = 1,000 yen, which is about $6.67 when USD/JPY is at 150.00. The guide Managing risk and position size works through a full JPY example.

Gold, indices and crypto do not use the forex lot. Their contract size, and so the value of a one-point move, differs from broker to broker. Find it in the platform’s contract specification before you trade, then use the same idea: value of a move = lots × contract size × size of the move.

Leverage and margin in brief

Leverage lets you open a position that is larger than the money you put up for it. The money set aside to keep the position open is called margin. Margin is a deposit, not a fee: it is released when you close the trade, and your profit or loss is added to or taken from your balance.

Leverage is written as a ratio, and the margin you need is the position value divided by the leverage:

• At 1:30, margin is 1 ÷ 30 = 3.33% of the position value
• At 1:100, margin is 1 ÷ 100 = 1%
• At 1:500, margin is 1 ÷ 500 = 0.2%

Leverage does not change what a pip is worth. One lot of EUR/USD moves $10 per pip whether it uses $3,615 or $1,084.50 of margin. What leverage changes is how large a position your account lets you open, and so how much you can lose compared with what you deposited. Picture a $5,000 account holding 1 lot of EUR/USD at 1:100. The margin of $1,084.50 looks modest, but a 100-pip move against you costs 100 × $10 = $1,000, which is 20% of the account. EUR/USD can move 100 pips in a few days, and sometimes in a single day.

Your platform also tracks free margin, the money still available for new positions and for absorbing losses, and margin level, which compares your equity with the margin in use. If losses push the margin level down to the broker’s margin call level, you get a warning. If it falls further to the stop out level, the platform starts closing positions for you. Each broker sets its own levels, so look them up in your account terms.

The guide Leverage and margin explained covers free margin, margin level and stop outs with full worked examples.

Placing your first order

A market order buys or sells right away at the best price available. A buy fills at the ask and a sell fills at the bid. In a fast market the fill can differ from the price you saw. That difference is called slippage, and it can go against you or in your favor.

A pending order waits until the price reaches a level you choose. The common types are:

• Buy limit: buy below the current price, if it dips to your level
• Sell limit: sell above the current price, if it rises to your level
• Buy stop: buy above the current price, if it breaks higher
• Sell stop: sell below the current price, if it breaks lower

Two more levels close a position for you. A stop loss closes it when the price moves against you to a set level, which caps the planned loss. A take profit closes it when the price reaches your target. A stop loss is not a guarantee: if the market gaps over a weekend or jumps on news, the position closes at the next available price, which can be worse than your level.

In SPM Trader, the order ticket keeps these choices in one window. With the order type set to Market Execution, you can enter your risk in the Risk (% equity) field together with a stop loss, and the platform calculates the lot size before you click. Stop loss and take profit can be set as a price, in pips or in dollars. You then click Sell by Market or Buy by Market. Pending orders are available as well, for when you want to wait for a price.

A simple routine for every order:

1. Open the order ticket for the market you want and check the current spread.
2. Decide where the stop loss goes, at a level where your trade idea would be wrong.
3. Set the size so that hitting the stop costs only what you planned.
4. Set a take profit, or decide in advance how you will manage the exit.
5. Check the dollar amounts shown for the stop loss and the take profit.
6. Click Buy by Market or Sell by Market, then check that the open position shows your stop loss and take profit.

Sizing a position so one trade can’t hurt your account

Size decides how much a single trade can cost. A widely used rule is to risk no more than about 1% of your account on any one trade. Risk here means the amount you lose if the stop loss is hit, not the margin and not the position value.

To turn that rule into a size, use one formula: position size (lots) = money at risk ÷ (stop distance in pips × pip value per lot).

Notice the order: the stop comes first, and the size follows from it. If your analysis calls for a 50-pip stop, the size becomes $100 ÷ (50 × $10) = 0.2 lots. The dollar risk stays at $100 either way. A wider stop means a smaller position, not a bigger loss.

Small risk matters because losing streaks are a normal part of trading. If you risk 1% of the current balance on each trade, ten losses in a row take a $10,000 account to about $9,044. At 5% per trade, the same streak leaves about $5,987, and getting back to $10,000 then needs a gain of about 67%.

SPM Trader can do the arithmetic for you. Enter your Risk (% equity) and your stop loss in the order ticket, and the platform calculates the lot size before you click. You still choose the stop and the risk; the ticket only does the math.

Build these habits on a demo account, which comes with up to $100,000 in virtual funds. If you plan to start live with less, size demo trades as if the account were that size, so 1% means the same in both. You can open a free demo account and follow this routine:

1. Pick one market, such as EUR/USD, and learn its spread and pip value.
2. Before each trade, write down the entry, stop loss, target and size.
3. Place the order with the stop loss attached from the start.
4. Record the result in dollars and as a percentage of the account.
5. After 20 trades, review what worked, what did not and whether you kept to 1%.