CFD Trading Examples

Buying

For example, JP Morgan Chase & Co (JPM) is quoted at a bid/ask price of 1,599/1,600p, and a trader intends to buy 1,000 share CFDs (units) anticipating a price increase. JPM has a tier 1 margin requirement of 5%, meaning traders need to deposit only 5% of the position’’s notional value as margin.

In this case, the trader’’s CFD position margin will be ££800 [calculated as 5% x (1,000 units x 1,600p buy price)]. However, if the market moves against the trader, it’’s possible to incur losses exceeding the initial margin deposit (££800).

In this scenario, there are two potential outcomes:

a) Realizing a Profit on the Trade

If the price moves in the trader’’s favor and rises within the next hour to a bid/ask of 1,624/1,626, and the trader closes their position by selling at 1,625, they will realize a gross profit of ££250.

The profit is calculated by multiplying the difference between the exit price and entry price by the position size.

In this example, it’s (1,625 - 1,600) x 1,000 units = ££250.

The net profit on JPM is calculated by subtracting total commissions from the gross profit. The commissions are calculated as follows:

1,000 units x 1,600 pence (entry price) x 1.10% = ££16.00

1,000 units x 1,625 pence (exit price) x 1.10% = ££16.25

Total commissions = ££32.25

Net profit: ££250 - ££32.25 = £217.75

b) Realizing a Loss

If the trader’s forecast is incorrect and the price declines to a bid/ask of 1,549/1,550, they may close the position by selling at 1,549 to limit further losses.

The gross loss is calculated similarly to profit:

(1,600 - 1,549) x 1,000 units = ££510

The total loss includes commissions plus the gross loss:

Total commissions: [1,000 units x 1,600 pence x 0.10%] + [1,000 units x 1,549 pence x 0.10%] = ££31.49

Total loss: ££510 + ££31.49 = £541.49

Selling

In a short-selling scenario, JPM is quoted at a bid/ask price of 1,599/1,600p. A trader opts to sell 1,000 share CFDs (units) expecting the price to decline. As with the buying example, JPM has a tier 1 margin rate of 5%, so traders must deposit 5% of the position’’s value as margin.

The position margin is calculated as:

(5% x (1,000 units x 1,599p sell price)) = ££799.50

Again, losses can exceed the initial margin deposit.

There are two possible outcomes when selling your position:

a) Realizing a Profit

If the trader’s prediction is correct and the bid/ask price falls to 1,549/1,550, and they close the position by buying back at 1,550 pence, they will realize a profit of ££490.

Profit: (1,599 - 1,550) x 1,000 units = ££490

The net profit is calculated by subtracting total commissions from the gross profit:

1,000 units x 1,599 pence x 0.10% = ££15.99

1,000 units x 1,550 pence x 0.10% = ££15.50

Total commissions: ££15.99 + ££15.50 = ££31.49

Net Profit: ££490 - ££31.49 = ££458.51

b) Realizing a Loss

If the trader’s prediction is incorrect and the price rises to 1,649/1,650, they may choose to limit losses by buying back at 1,650 to close their position.

The loss is calculated by multiplying the position size by the difference in buy price:

(1,650 - 1,599) x 1,000 units = ££510

To calculate total loss, add gross loss and commissions:

[1,000 units x 1,650 pence x 0.10%] + [1,000 units x 1,599 pence x 0.10%] + ££510 = ££542.49

Calculating Profits and Losses

With these trading scenarios and formulas clearly outlined, CFD trading is more straightforward than it might initially appear. A trader’s profit or loss is determined by the difference between the entry price and the exit price of a trade.

Learn more about CFD trading for beginners here.

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