Trading CFDs For A Living
Whether you can trade CFDs for a living depends on your skill, experience, risk management, dedication, and financial situation. While some traders successfully make a living from CFD day trading, it’s important to recognize that this financial product also carries significant risks.
In this guide, we explore the key considerations to trade CFDs full-time.
Quick Introduction
- To trade CFDs for a living, you need to generate profits that are sufficient to cover your living expenses, costs, and taxes.
- You must have a thorough understanding of the risks involved and be prepared for periods of drawdowns or losses.
- Implementing risk management is the only way to achieve profits in the long term, from appropriate position sizing to setting stop-loss orders.
- To pursue full-time trading, ensure CFDs are available in your country, select a good broker, choose your trades wisely, and understand taxes.
Best Brokers For CFD Trading
Following years of testing, these 4 brokers emerge as the best for day trading CFDs for a living, providing the complete package for serious traders:
Does My Country Allow CFD Trading?
Before you embark on CFD trading as a profession, it’s important to understand to what degree this short-term trading product is accessible and regulated where you live.
While CFD trading is popular in many parts of the world, some countries have imposed restrictions or outright bans on CFDs for retail investors due to concerns about trader protection.
Regulated Markets: In some countries, CFD trading is well-established and regulated by financial authorities. Examples of countries with regulated CFD markets include the UK, Australia, and many European countries. Day trading CFDs for a living is an accessible route if you live in these countries.
Banned Or Restricted Countries: There are also countries where CFD trading is either banned outright or heavily restricted for retail investors. For example, the US and Hong Kong prohibits CFD trading for retail investors. Day trading CFDs for a living is not accessible if you live in these countries unless you turn to unregulated markets.
Unregulated Markets: In some jurisdictions, CFD trading may occur in unregulated or offshore markets where investor protections are limited and regulatory oversight is minimal. For example, CFD brokers in locations like Vanuatu or St Vincent and the Grenadines often entice traders with huge leverage – up to 1:1000 in some cases. Day trading CFDs for a living in unregulated markets poses higher risks due to the lack of safeguards and transparency.
How Do I Choose A CFD Broker For Long-Term Success?
A pivotal step in your trading journey is selecting the right broker. A reliable platform could be the determining factor between successful CFD day trading for a living or falling short of your goals.
I’ve outlined the key considerations for full-time CFD traders choosing a broker:
Reputation: Assessing a broker’s reputation through regulations and reviews is vital. Previous issues with withdrawals, customer service or platform reliability could result in financial losses when relying on a broker’s services for full-time CFD trading.
- IG leads the pack here with 12+ regulatory licenses and 50+ years in the industry, while I’ve experienced reliable withdrawals from my real-money trades.
Costs & Fees: Although CFD fees may appear insignificant initially, they can accumulate rapidly, especially with frequent trading over many months or years.
- Year after year, IC Markets stands out for its superior pricing with ultra-tight spreads and rebates for serious traders.
Platforms: Platform variations among CFD brokers can be substantial, with what works for one trader potentially not suiting another. Comparing features such as charts, timeframes, indicators, and historical data is essential.
- eToro excels with a user-friendly custom platform that I really enjoy using, featuring an excellent charting package from TradingView.
Customer Support: Effective customer service is essential for a seamless trading experience in the long run. Some CFD brokers offer 24/7 support in multiple languages, ensuring swift resolution of issues.
- Plus500 has among the most reliable support we’ve seen with around-the-clock assistance that’s proven invaluable when addressing faults or errors.
Extra Services: Brokers offering additional services can simplify position tracking and management when trading CFDs for a living. Features like guaranteed stop-loss orders (GSLOs) can mitigate potential profit erosion from significant reversals, while access to third-party research tools can help you identify opportunities.
- CMC Markets is an excellent option here with GSLOs and first-rate market insights from MorningStar.
When trading CFDs full-time, I recommend periodically reassessing broker options to ensure you’re utilizing the best available choice. Additionally, if trading multiple types of CFDs concurrently, using different brokers can optimize pricing competitiveness.
What Markets Should I Trade?
When contemplating embarking on CFD trading as a primary source of income, take time to consider the specific financial markets you intend to engage with.
CFDs offer diverse opportunities across various commercial derivatives markets, catering to a wide range of preferences and trading styles.
If you prefer aligning with the performance of individual companies, stock CFDs may be suitable, whereas if you are seeking less volatility and broader market exposure, you may find index CFDs more appealing.
Some of the most popular options to trade CFDs professionally include forex and crypto.
To help you understand exactly how a CFD trade works, let’s consider that I want to trade a stock that has an ask (buy) price of $50.10, and I decide to purchase 200 shares. The total transaction cost amounts to $10,020 (excluding any commission and fees).
At a traditional broker with a 50% margin account, this trade would require at least $5,010 in free cash, while a CFD broker might only necessitate a 5% margin (1:20 leverage), equivalent to $501.
This CFD trade would initially show a loss equal to the spread’s size at the time of the transaction. Assuming a spread of 10 cents, the stock would need to gain 10 cents for the position to reach the breakeven price. Although owning the stock outright would yield a 10-cent gain, it entails commission payments and a larger capital outlay.
Now, let’s consider the scenario where the stock rallies to a bid (sell) price of $51.00 in a traditional broker account. Selling it would result in a $180 profit ($1,000/$5,010), equivalent to a 3.59% profit margin based on the initial investment.
However, at this price level, the CFD bid price may only reach $50.98, resulting in a lower profit due to the need to exit at the bid price and the wider spread compared to the regular market.
In this scenario, I earn an estimated $175.20, equivalent to a 34.92% return on investment based on the initial margin of $501.
While the CFD broker may require purchasing at a slightly higher initial price, such as $50.20, the net profit of $169 to $175.20 from the CFD trade surpasses the $180 profit from owning the stock outright, which does not account for commissions or other fees, ultimately leaving you with a higher net profit, and making CFDs an attractive vehicle for full-time traders.
Do I Have To Pay Tax On CFDs?
Understanding your tax obligations is critical if you want to trade CFDs for a living, as rules can change when you switch from casual speculation to full-time trading.
CFDs are also subject to different tax treatment compared to traditional shares or asset ownership. This distinction arises from the fact that CFD traders do not own the underlying asset referenced by the CFD, but instead enter into contracts based on asset prices.
In the UK, for example, stamp duty is typically levied on transactions involving normal shares, commodities, and other securities. However, if you are engaging in CFD trading for a living you are exempt from paying stamp duty. While the stamp duty rate is relatively low (around 0.5% if the transaction is over £1,000), over time, this tax could accumulate.
CFD taxes vary depending on your country of residence and the specific regulations governing financial transactions and investments. In many countries, profits from CFD trading are subject to either capital gains tax (CGT) or income tax.
CGT is typically levied on the difference between the purchase and selling prices of the CFD position. In the UK, how much capital gains tax you pay depends on how much you earn, but the two rates are 10% for the basic rate and 20% for higher rate.
Regardless of your employment status – whether you’re self-employed, a part-time trader, or fully engaged in day trading – once your gains surpass the tax threshold, you become subject to CGT.
Furthermore, income tax may apply if CFD profits are considered as income, and stamp duty or other financial transaction taxes may also apply in certain countries.
I recommend consulting with a qualified tax advisor or accountant familiar with the tax laws in your country to understand how CFD trading is taxed and ensure compliance with current obligations.
Tips For Full-Time Traders
Here are my top tips if you want to start day trading CFDs for a living:
- Start with a demo account. I’ve found these an incredibly valuable tool for exploring platform features and testing trading strategies before risking real money.
- Don’t get drawn in by excessive leverage. While trading CFDs for a living often involves leverage, beginners in particular should steer clear of the very high leverage which can reach 1:1000 at some online brokers. Respected regulators cap leverage for a reason.
- Don’t obsess over short-term profits. I know from my own experience trading that profits and losses can fluctuate much like the financial markets. The key is sticking to your plan and focusing on returns over a sustained period.
- Keep a trading journal. All successful endeavors involve learning from mistakes and refining approaches. Keeping a journal of CFD trades made, outcomes and asset types can help you optimize your process and avoid repeating errors.
Successful CFD trading in the long run requires discipline, patience, and consistency. Stick to your trading plan, avoid chasing losses or the latest market trends, and be prepared to accept both winning and losing trades as part of the journey.
Pros And Cons Of Trading CFDs For A Living
Pros
- CFD trading allows you to participate in financial markets without geographical limitations. This enables you to capitalize on opportunities arising from global economic developments, geopolitical events, and market trends.
- CFDs give you access to leveraged positions, so you can control larger positions with a smaller amount of capital. This amplifies both potential profits and losses, offering the opportunity for significant returns with a relatively small initial investment.
- CFDs provide exposure to a wide range of financial markets, all from a single trading account. You can diversify your portfolio and capitalize on various market opportunities without the need for multiple brokerage accounts.
- Short selling lets you benefit from falling markets. This flexibility is particularly advantageous in volatile or bearish market conditions, where traditional investment strategies may struggle to generate returns.
- In some countries, profits from CFD trading may be subject to favorable tax treatment compared to other forms of investment income.
Cons
- Unlike traditional investing, day trading CFDs do not involve ownership of the underlying asset. You speculate on price movements without owning the actual asset, which means you do not receive dividends, voting rights, or other benefits associated with ownership.
- CFD trading can be complex and challenging, particularly if you are inexperienced. I know from first-hand experience trading over many years that the markets can be highly volatile, with prices fluctuating rapidly in response to various factors such as economic data releases, geopolitical events, and market sentiment.
- Trading CFDs involves significant risk due to leverage, which amplifies both potential profits and losses. You can quickly lose more than your initial investment if the market moves against you, leading to substantial losses.
- CFD trading is subject to regulations imposed by financial authorities in different jurisdictions. Regulatory restrictions may include leverage limits, margin requirements, and investor protection measures aimed at reducing risks. These regulations can affect trading conditions, profitability, and access to certain markets.
Bottom Line
Ultimately, while day trading CFDs for a living is possible for some individuals, it requires dedication, discipline, and a realistic assessment of your skills and resources. It’s important to approach CFDs with caution and to be prepared for both the rewards and challenges it entails.
To get started, gain experience through demo accounts or sign up with one of the best CFD brokers.