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Best Day Trading Platforms and Brokers in 2024
Written By
James Barra
Edited By
William Berg
Fact Checked By
Jemma Grist
This guide to CFD day trading for beginners will explain how they work, discuss the pros and cons of using them, and provide a rundown on how traders can get started.
A contract for difference is an agreement between two parties to pay the difference between the opening and closing price of an asset.
They are flexible instruments that allow traders to profit (or lose) from changes in asset values without having to own the underlying security.
A contract for difference is an agreement between two parties to pay the difference between the opening and closing price of an asset.
CFDs can be used to gain exposure to a variety of asset classes including stocks, commodities, forex and cryptocurrencies.
Traders have the option of opening both long and short positions, thus allowing them to make profits even when markets fall.
Top 4 CFD Brokers in South Africa
These brokers offer the best selection of CFDs with low fees, attractive leverage, powerful trading platforms and strong regulatory oversight:
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What Are Contracts For Difference?
CFDs provide traders with the opportunity to speculate on price movements across a diverse range of asset classes.
Critically, holders of these contracts do not own the underlying asset themselves (such financial instruments are known as derivatives). They simply aim to make money on any price changes. They also risk losing money, if prices move against them.
These instruments are an agreement between two parties – the trader and the broker – to pay the difference between the opening and closing price of an asset. These can include stocks, currencies, commodities and cryptocurrencies
CFDs were introduced in the early 1990s as a way for hedge funds, institutional investors and professional traders to gain exposure to equities on the London Stock Exchange. Over time the market opened up to retail investors and has steadily evolved, resulting in the rapid industry growth of the last decade.
CFD trading is popular across the globe, although it is banned in some territories, including the US and Hong Kong. This is because using leverage unwisely can lead to large losses.
CFD day trading on Plus500 platform. Source: Plus500
How Do CFDs Work?
CFDs are typically traded over the counter (which puts them in the category of OTC securities).
In other words, there is no centralized exchange where they are traded like stocks, commodities and futures contracts, for example. Instead, they tend to be offered directly to traders by brokers and financial institutions.
Individuals can choose to go long (speculating on the price going up) or short (speculating on a falling price) when trading CFDs.
They can also decide whether or not to use leverage to multiply their potential returns (or losses when a position goes the wrong way!).
Long Versus Short
CFDs allow traders to speculate on rising and falling asset prices. This is because they do not transfer ownership of the underlying asset when the trade is executed.
If an investor thinks the market will rise, they will go long and purchase a contract from their broker. Conversely, they will go short if they believe prices are going to fall. In this instance, they will borrow the CFD from the contract provider and sell it to the market.
So how do traders make money? In the case of a long trade, an investor will buy the CFD at the market price and look to sell it back after (hopefully) the value of the underlying asset has risen. They will then pocket the difference, which is paid by the brokerage.
However, if the asset falls in value, the trader will be required to pay the difference to the CFD provider, resulting in a loss.
The process of going short works in the opposite way. Bearish traders will borrow the contract from the broker and sell it in the hope of buying it back at a lower price later on. But if the price unexpectedly rises, the trader will have to repurchase the CFD at this higher price and pay the difference to the contract provider.
The Leverage Factor
Many people are drawn to CFD trading because they have a chance to use leverage to pump up their potential returns – though the risk of losing money also increases.
The use of funds borrowed from an online broker allows individuals or entities to control a larger position than if they used just their own funds. This increases both reward and risk.
It is common for CFDs to offer higher leverage than most other financial markets. There are several factors that determine how much leverage one can access, including the brokerage used, the asset being traded, and the rules laid down by the relevant regulator.
To use leverage, traders need to put down a portion of the total value of the investment, known as margin. The balance is borrowed from the broker.
In the event that the trade moves against them, an investor may be required to deposit additional funds to cover potential losses. This is known as a margin call.
Source: FxPro Website
Here you can see the maximum leverage that FxPro offers CFD traders for different asset classes. A leverage ratio of 1:5 (or margin rate of 20%) means that a trader can control a position size of $5,000 with just $1,000 of their own capital.
Whilst the use of leverage can supercharge a trader’s earnings, massive losses can be racked up if markets move in an unexpected direction. The number of people who end up making a negative return is significant.
Managing Leverage Risk
This is why taking a sensible approach to leverage is essential when CFD trading. It is a good idea for beginners to use low leverage or even no leverage at all.
Leverage of 1:2 or 1:3 can help new traders take part in the market without exposing themselves to monster levels of risk.
When your CFD trading strategy is paying off, it can be hard to resist racking up higher levels of leverage in the pursuit of bigger profits. But keeping a level head (and especially at the beginning) in this situation is critical. One highly leveraged loss can wipe out all the success you’ve had leading up to that point.
It is also important for traders to use tools like stop loss orders to help them establish strong risk management protocols. These particular functions automatically close a position when the market plunges to a price level that the trader has pre-selected, which in turn helps to minimize losses.
Take profit orders are another weapon that successful CFD traders frequently use. They work in a similar way to stop losses in that they close a position when prices reach a certain level, in this case when the market has risen to a point previously identified by the investor.
Not only do take profit orders allow profits to be locked in before the opportunity passes. They help minimize the emotional aspect of the CFD day trading process, thus preventing traders from chasing bigger profits based on unsound reasoning.
Top Platforms For Day Trading – Fee Data
Markets
Our recommended brokers provide access to popular global markets, such as stocks, forex and commodities, something we confirm by signing in to brokers’ platforms to record the assets available.
We also consider the availability of trading vehicles that cater specifically to day traders, such as contracts for difference (CFDs). This derivative allows you to speculate on rising and falling prices without owning the underlying asset.
You can compare the financial markets available at our best brokers below.
Note market access may vary depending on jurisdictional rules.
Movements in currency pairs are measured in pips, which stands for ‘percentage in point’ or ‘price interest point.’ Like EUR/USD, the majority of pairs are quoted at four or five decimal places.
When searching for the price of a forex pair a trader will see two prices. These are the bid price, the price at which a trader can sell a forex pair, and the ask price, which is the price at which a trader can buy a currency pair.
The difference between these two prices is known as the spread. It is also measured in pips, and illustrates the profit a broker will make on a specific transaction. Day traders need to pay close attention to this: large spreads can eat into profits.
Pros & Cons Of Forex Day Trading
For retail investors, participating in the foreign exchange market carries a range of advantages and disadvantages. These include:
- Trades can be placed 24 hours a day, five days a week. This provides excellent flexibility and means participants don’t have to worry about things like exchange opening times.
- Most of the top forex day trading brokers offer a vast range of currency pairings to trade. More choice equals more opportunities to make a profit.
- High liquidity means that day traders can enter and exit positions quickly.
- The costs and fees associated with forex trading are usually much lower than those of other financial markets. In fact, some brokers operate on a ‘zero commission’ basis.
- Traders can get much higher levels of leverage through margin trading. This can amplify gains by providing a trader with more capital. But beware: it can also multiply losses if a trade goes wrong.
- Forex prices can be highly volatile and movements are hard to predict. Whilst this presents opportunities to make a profit, it can also open the door to losing a lot of money.
- Forex trading is complex and requires a solid knowledge and understanding of fundamental and technical analysis (the method of forecasting price movements using charts and data). Those who have neither the time nor resources to become experts leave themselves open to making large losses.
- The health and performance of a specific currency are tied closely to those of the issuing country or region. So signs of economic or political turmoil can cause a counter to plummet. This is a particular danger for developing nation currencies.