Before starting CFD trading, there are many important terms a trader must know and understand well. Without them, it can be hard to understand how CFD trading works, and you may struggle to build an effective trading strategy.
CFD trading has the benefit of leverage, facilitates scalping and day trading, and you may need to pay commission to your broker, and many more. With the right CFD trading strategy, you can profit or even speculate and end up with potential losses.
Hold on. Are you not sure about these terms? Worry not. Let's start by learning each CFD term with clear examples so it all makes sense as we go.
Understanding Key CFD Trading Terminologies
Check out these 41 CFD trading terminologies, which you must know before you start CFD trading.
1. Contract
A CFD contract represents an agreement between a trader and a CFD broker to exchange the difference in an asset’s value between the time the contract is opened and closed.
It’s a deal between you and the broker to trade on the price change of something without owning it.
Suppose you open a CFD contract on oil at $75. If it goes up to $78 when you close the trade, you earn the difference, $3 per unit. You never own the oil itself, just the price movement.
2. Leverage
Leverage in CFD trading refers to using borrowed funds from a broker to gain greater exposure to the market than the capital you deposit. It multiplies both potential profits and losses.
Simply put, leverage lets you trade a bigger amount than what you actually have in your account.
Let’s say you have $100 and use 1:50 leverage. That means you can open a position worth $5,000. If the market moves in your favor by 1%, you make $50 instead of $1. But if the market goes against you by 1%, you lose $50. So, it boosts both gains and risks.
3. Spread
The spread is the difference between a trading instrument's bid (selling) price and its ask (buying) price. It is effectively the broker's fee for providing the platform and everything to trade.
So, the spread is the tiny price gap between what you can buy and sell at. It's a hidden cost.
If a CFD’s buy price is 1.2500 and the sell price is 1.2498, the spread is 2 pips. This means you instantly start with a slight loss when you open a trade. You need the market to move enough in your direction to cover that spread first before making a profit.
4. Commission
A commission is a fixed fee that some brokers charge per trade, either based on trade volume or as a flat rate. It is separate from the spread.
It’s the broker’s extra fee for letting you trade, charged per trade.
If your broker charges $3 commission per trade, and you open and close one CFD position, that’s $6 total. $3 for opening and $3 for closing, added to your trading costs.
5. Pips
A pip (short for "percentage in point") is a standardized unit used to measure the change in value between two currencies. For most pairs, one pip equals 0.0001.
A pip shows how much the price has moved; even tiny changes are measured in pips.
If EUR/USD moves from 1.2050 to 1.2055, that’s a 5-pip move. If you're trading 1 lot (which is usually 100,000 units), every pip could mean a $10 change in your profit or loss. This depends on the direction of the trade.
6. Lot
A lot in CFD trading refers to the standardized size of a trade. One standard lot usually equals 100,000 units of the base currency in forex, though this can vary depending on the asset.
A lot is just the size of your trade.
If you trade 1 standard lot of EUR/USD, you’re trading 100,000 units of euros. Even if you don’t have that amount, leverage lets you trade it. Want to trade smaller? Use micro (0.01) or mini (0.1) lots.
7. Bid and Ask Price
The bid price is the highest price a buyer is willing to pay for an asset, while the ask price is the lowest price a seller is willing to accept. The difference between the two is the spread.
Bid is the price you sell at. Ask what the price you buy at is.
Say EUR/USD has a bid of 1.2050 and an ask of 1.2052. If you want to buy, you’ll get it at 1.2052 (the higher ask price). If you want to sell, you'll do it at 1.2050 (the lower bid price).
That 2-pip gap is the spread, and your trade starts at a slight loss until the price moves in your favor.
8. Closing Price
The closing price is the final price at which a CFD position is closed. This could be the market price when you manually close a trade or when it hits a stop-loss or take-profit level.
It’s the price at which your trade ends, either when you close it or it closes automatically. Like you bought a CFD at 1.3000 and closed it at 1.3050. That 1.3050 is your closing price, and it’s used to calculate your profit or loss.
9. Balance
Balance is the total amount of money in your trading account, excluding any open trades. It reflects your account value after all closed trades.
It’s how much money you have in your account when no trades are running.
You start with $1,000. You open a trade, and it’s still running; your balance stays at $1,000. Only when you close the trade does your profit or loss get added to or subtracted from the balance.
10. Margin
Margin is the amount of money you need to deposit to open and maintain a leveraged position. It’s a small part of the full trade value.
It’s the small chunk of money your broker holds while you trade a bigger amount using leverage. To trade a $10,000 position with 1:100 leverage, you only need $100 as margin. That $100 is locked while your trade is active.
11. Margin Call
12. Free Margin
Free margin is the amount of money in your account available to open new positions. It’s calculated as Equity minus Used Margin.
13. Used Margin
The used margin is the total amount of your funds that are currently locked to maintain open positions. It’s not available until the trades are closed.
14. Hedging
Hedging in CFD trading is a risk management strategy used to offset potential losses in one position by taking an opposite position in the same or a related asset.
It’s like placing a second trade to protect yourself if the first one goes wrong.
Let’s say you buy gold because you expect it to go up. But if it drops, you open a sell (short) trade on silver. If gold falls and you lose there, your silver trade might balance out that loss. That’s hedging, reducing risk.
15. Liquidity Provider
A liquidity provider is a large financial institution or firm that supplies the market with buy and sell orders, making it easier for brokers and traders to execute trades quickly and at stable prices.
They’re big players that keep the market running smoothly by always offering prices to buy and sell.
Think of it this way: when you place a trade, your broker sends it to a liquidity provider (like a bank or fund), who accepts the trade on the other side. This ensures you get fast execution and fair pricing.
16. Order Types
Order types in CFD trading refer to the instructions a trader gives to a broker on how and when to enter or exit trades. Common order types include market orders, limit orders, and stop orders. Order types are the ways you tell the broker when and how to open or close a trade. These help you automate your trades instead of watching the screen all day.
Market order: You buy or sell instantly at the current price.
Limit order: You set a price, and the trade happens only if the market reaches it.
Stop order: You set a trigger price, and the trade opens only when that price hits.
17. Market Order and Pending Order
A market order is a type of trade instruction to buy or sell a financial instrument immediately at the best available current price in the market. It means you're telling the system, "Buy or sell now, at whatever price is available.
A pending order is an instruction to buy or sell a financial instrument at a specific price level in the future, once the market reaches that price. It’s a “wait and trade later” order. You choose your price, and it opens automatically when that price hits.
18. Stop Loss
A stop loss is a preset order to automatically close a losing position at a specific price to prevent further losses. It’s a safety net that closes your trade if things go too wrong.
You buy EUR/USD at 1.1000 and set a stop loss at 1.0950. If the price drops to 1.0950, your trade closes automatically. You lose a small, controlled amount instead of risking everything.
19. Take Profit
A take profit is a preset order to automatically close a position when it reaches a certain profit level.
It locks in your gains by closing the trade when you hit your profit goal.
You buy gold at $1,900 and set a take profit at $1,950.
Once gold hits $1,950, your trade closes on its own and your profit is secured, even if you’re offline.
20. Dividends
Dividends are company profits paid to shareholders. In CFD trading, if you hold a CFD on a dividend-paying stock, you may receive (or pay) a dividend adjustment based on your position and whether it's long or short.
When a company pays profits to its investors, you may get a small payout too, if you’re buying the stock CFD.
You hold a buy CFD on Apple shares when they issue a dividend. You’ll get a dividend adjustment credited to your account. If you’re holding a sell position, the same amount may be deducted instead.
21. Position Size
Position size is the total value or volume of a trade in the market, determined by how much of an asset you're buying or selling, and it directly affects your potential profit or loss.
It’s the amount you choose to trade. Bigger position = bigger risk and reward.
You open a 0.5 lot trade on EUR/USD (that’s 50,000 units). If each pip is worth $5, a 10-pip move means $50 profit or loss. That’s the power of position size; it controls how much money is on the line.
22. Long/Short Positions
A long position is when you buy an asset expecting its price to go up. A short position is when you sell an asset first, expecting its price to fall, so you can buy it back at a lower price for profit.
Long = You think the price will go up.
Short = You think the price will go down.
You go long on NASDAQ at 15,000. If it rises to 15,300, you profit from the increase. You go short on gold at $2,000. If it drops to $1,950, you buy it back cheaper and keep the difference as profit.
23. Open & Close Position
To open a position means to start a new trade in the market. To close a position means to end that trade and lock in your result, whether it's profit or loss.
Open = Start the trade.
Close = End it and see your result.
You open a trade on crude oil at $75. Later, you close it at $78. You made a profit because the price went up. That’s the full trade, open to close.
24. Trading Session
A trading session is a specific time block when a financial market is active. The global market has four major sessions: Sydney, Tokyo, London, and New York.
Different markets open and close at different times. These time blocks are called sessions.
The London session (8 AM–4 PM GMT) is highly volatile, especially when it overlaps with the New York session. If you want more price movement, trade during these overlaps for better chances.
25. Volatility
Volatility measures how much and how fast an asset's price moves over time. High volatility means large price swings, while low volatility means stable, slow changes.
It’s how crazy or calm the price moves. More movement = more chances to profit (or lose).
If Bitcoin jumps from $25,000 to $26,500 in one hour, that’s high volatility. If the EUR/USD moves only 10 pips all day, that’s low volatility. Volatility tells you how wild or chill the market is.
26. Bear and Bull Market
A bull market refers to a financial market where prices are consistently rising. A bear market refers to a market where prices are steadily falling over time.
Bull = Market going up.
Bear = Market going down.
If the stock market keeps climbing for weeks, that’s a bull market. If prices keep dropping for days or weeks, that’s a bear market. You can make money using CFDs by going long in bulls and short in bears.
27. Slippage
Slippage occurs when a trade is executed at a different price than expected due to market volatility or execution delays.
It’s the small difference between the price you wanted and the price you actually got.
You place a buy trade on EUR/USD at 1.1000, but it gets filled at 1.1003. That 3-pip difference is slippage, often caused by fast-moving markets or low liquidity.
28. Equity
Equity in CFD trading is the total value of your trading account, including your balance and any unrealized profits or losses from open positions.
It’s your account’s real-time value, which is what you’d have if you closed all trades right now.
Your balance is $1,000. You have an open trade showing $100 profit. Your equity is now $1,100. If that trade goes negative by $50, your equity drops to $950.
29. Charges and Fees
Charges and fees in CFD trading include costs like spreads, commissions, overnight swaps, inactivity fees, and withdrawal fees imposed by brokers for their services.
These are the small costs you pay your broker to trade, like commissions or holding charges.
30. Swap
A swap is the interest paid or earned for holding a CFD position overnight. It's based on the difference in interest rates between the currencies or assets involved.
It’s a small fee (or sometimes a reward) for keeping your trade open overnight.
You keep a forex trade open overnight. Depending on the currency pair and your position (buy/sell), the broker may charge or credit you with a swap fee. You might see -$0.75 or +$0.25 on your account the next morning.
31. Cost
Cost in CFD trading refers to the total expenses a trader incurs while opening and maintaining a trade. This includes the spread, commission, swap (overnight fees), and any platform or transaction fees charged by the broker.
It's what you pay for trade fees, spreads, or charges that reduce your profit.
You open a trade on crude oil.
Spread: 2 pips
Commission: $1
Swap: $0.50 overnight
So even if the trade wins, you already paid $1.50; that’s your cost.
32. Fundamental Analysis and Technical Analysis
Fundamental analysis evaluates economic data, news, interest rates, and financial events to determine the value of an asset.
Technical analysis studies historical price movements and uses tools like charts, patterns, and indicators to predict future price direction.
Fundamental = News- and economy-based trading
Technical = Chart and pattern-based trading
33. Assets
Assets in CFD trading are the financial instruments available for trade, such as currencies, stocks, indices, commodities, and cryptocurrencies.
These are the things you trade. It could be gold, EUR/USD, Tesla stock, Bitcoin, or anything else.
You open a CFD trade on the NASDAQ index. That index is the asset. You don’t own it physically, but you earn (or lose) based on its price movement.
34. Scalping
Scalping is a short-term trading strategy that targets small price movements. It aims to make quick profits by entering and exiting the market within minutes or even seconds.
It’s fast trading; you enter and exit quickly to grab small profits.
A scalper opens a EUR/USD trade and closes it after 2 minutes with a 5-pip gain.
They do this 20+ times a day. Those small wins stack up; that’s scalping.
35. Drawdown
Drawdown is the reduction in a trading account's equity from its highest point to its lowest point during a losing period, shown in percentage or dollar value.
It shows how much your account fell before bouncing back.
You had $10,000 in your account. After a few losing trades, it drops to $8,500.
That’s a 15% drawdown; it tells you how deep your losses went before recovery.
36. Risk Management
Risk management in trading involves using strategies to control losses and protect capital, including tools like stop loss, proper position sizing, and diversification. It’s how you protect your money from big losses.
You risk only 2% of your account per trade and always set a stop loss. Even if the trade fails, your account stays safe. That’s smart risk management; it keeps you in the game longer.
37. Risk-to-Reward Ratio
Risk-to-reward ratio compares the potential loss (risk) of a trade to its potential profit (reward), helping traders decide if a trade is worth taking. How much you risk vs. how much you could gain.
You risk $50 to potentially make $150. Your risk-to-reward ratio is 1:3 (risk 1 to gain 3). Better ratios help protect your money and boost profits.
38. Account Types
Account types refer to the different trading accounts brokers offer, each with unique features like spreads, commissions, minimum deposits, and leverage options tailored for different trader needs. Different accounts for different traders; some cost less, and some offer bigger leverage or better spreads.
39. Execution Model
An execution model is the method a broker uses to process trades. Common models include market execution (trades filled at the current market price) and instant execution (trades filled at the requested price or rejected).
How does your broker fill your trade right away or wait for your price?
With market execution, you click buy, and the trade fills at the best available price, even if it changes fast. With instant execution, if your price isn't available, the trade gets rejected, or you get a requote.
40. Execution
Execution is the actual process of completing a buy or sell order in the market after a trader places it. When your trade actually happens in the market.
You press “buy” on EUR/USD at 1.2000. The system processes your order and fills it at 1.2001. That’s the execution of your trade.
41. Break-Even Point
The break-even point is the price level at which a trade neither makes a profit nor incurs a loss, covering all costs like spread and commission. The exact price at which you don’t lose or make money.
You buy a stock CFD at $100 with a $2 spread. The break-even point is $102; the price must rise above this to start making a profit.
Conclusion
CFD trading offers several benefits, including high leverage and various technical analysis terms, enabling you to make informed trading decisions. However, this also comes with in-depth knowledge of each term of CFD. Only then can you start trading with the proper knowledge. So, we have shown you 41 CFD trading terms with examples for your better understanding.
