By doing this, we'll put the principles that we talked about in part 1 of this tutorial such as leverage, transaction costs and position sizing all into practice.

As you'll recall, the transaction costs of CFD trading include interest for long positions (but paid for short), commissions (if any) and also slippage depending on the market that you're trading.

And the benefits of CFD trading? These include the use of leverage on stocks, as well as the ability to go short on them to take advantage of falling markets.

So let's go through our example trade.

For this example, let's begin with a float of $10 000 cash. And let's assume that our CFD provider has leveraged of 10 to 1, hence our leveraged up float is $100 000.

And let's assume a position sizing model where we'll put $10 000 into each trade position.

Let's say that we went long on a stock CFD at a price of $5.70.

With a trade size of $10 000, the number of CFDs to buy would be 10 000/5.70, which equals 1754 CFDs.

For our stop loss, let's say that we have a stop loss set at $5.50. This is our protective stop. That is, if the price falls to or below $5.50, then we'd exit this trade at a loss of 20c per share.

Let's say that we're in the trade and the CFD price is going up.

A few days later, let's say that the CFD price is now $5.90, and that we now move our trailing stop up to $5.65.

A few days later, the CFD price rises to $6.32, and our trailing stop is moved up to $6.20.

Let's then say that the CFD price falls through the stop loss of $6.20, exiting us at $6.20, that is, assuming no slippage with our CFD broker since this was a liquid stock CFD that we have traded.

The entire trade lasted 14 days inclusive of entry and exit days.

Therefore the difference in the price from entry to exit = $6.20 - $5.70, which is $0.50.

Therefore our gross profit for this trade is = (difference between entry and exit price) x (number of CFDs), which is 0.50 x 1754, which comes to $877.

To work out our net profit, we'll need to now calculate our transaction costs.

Our transaction costs = commission + interest.

Commission

Let's assume that our CFD broker's commission is $15 one way, or 0.15% of the trade size, whichever is greater. In this example, where put trade size was $10 000, our commission would be $15 + $15, which comes to $30 for the entire round trip.

Interest

Let's say that our CFD provider's interest rate charge for long positions is 7.5% or 0.075 per annum. To work out how the actual cost for our example trade, we'll need to make it “pro rata”, and then multiply it by our trade size.

Interest = (interest rate for long position per annum) x (days in trade/365) x (trade size), which is 0.075 x 14/365 x 10000, which comes to $28.76.

Net profit

So our net profit = gross profit - (commission + interest)

= $877 - (30 + 28.76)

= $818.24

Remember that for short positions, interest is paid to you, not charged, so will offset rather than contribute to the costs. Also realise that in this example, the interest charge is slightly simplified because the interest for CFD providers is usually calculated on the market value of the trade position on a daily basis. If we did calculated the interest cost using the final position size of 10818.24, the interest would be $31.28. Thus the real interest cost would be somewhere between $28 and $31. As you can see the initial estimate is close enough.

So now you've gone through an entire CFD trade. Well done!

The margin needed for the trade was $1000. The return on investment, or ROI, as a percentage of margin used, is therefore 82%.

So you've gone through and understood the working of a CFD trade. It's actually quite simple in its mechanics.

It is due to the leverage, relatively low cost, and automated stop losses, CFD trading can be very rewarding.

And you've also seen exactly how transaction costs are calculated for a CFD trade.