Module 1: Start Here · Lesson 3 of 6 · Back to course
Now that you know what trading is and which markets you can trade, it’s time for the mechanics. This lesson covers the handful of ideas behind every trade you’ll ever place:
- going long (buying) and going short (selling)
- measuring price moves in points and pips
- the spread and other trading costs
- leverage and margin – and why they’re the biggest risk for beginners
- working out your risk before you click buy
Grab a calculator. The maths is simple, but working through it yourself is the best way to make it stick.
Going long and going short
With spread bets and CFDs you can profit, or lose, whichever way the price moves:
- Going long (buying): you profit if the price rises and lose if it falls.
- Going short (selling): you profit if the price falls and lose if it rises.
Going short sounds odd at first – how can you sell something you don’t own? With spread bets and CFDs you aren’t buying or selling the actual asset. You’re agreeing a contract with your provider based on the price. So selling first and buying back later is just as easy as the other way round.
Going short is not safer or riskier in principle than going long. But a price can rise without limit, so a short position without a stop-loss can, in theory, keep losing. UK retail clients get negative balance protection, which means you can’t lose more than the money in your account. That limits the worst case, but losing your whole account is still a very real outcome.
Points and pips: measuring price moves
To work out profit or loss, you need a unit to measure price changes.
- Points: Used for indices, shares and many commodities. If the FTSE 100 moves from 8,200 to 8,250, that’s a 50-point move.
- Pips: Used for forex. For most currency pairs a pip is the fourth decimal place – 0.0001. If GBP/USD moves from 1.3000 to 1.3050, that’s 50 pips. Pairs that include the Japanese yen are the exception: there a pip is the second decimal place (0.01).
Many platforms show an extra decimal place (sometimes called a “pipette”), so GBP/USD might appear as 1.30005. Don’t let that confuse you – the pip is still the fourth decimal place.
The spread: the cost you pay on every trade
Every market has two prices:
- the sell (bid) price – the price you can sell at
- the buy (ask/offer) price – the price you can buy at
The buy price is always a little higher than the sell price. The gap is the spread, and it’s the main way many providers earn money from you.
Hypothetical example: a provider quotes the FTSE 100 at 8,199.5 / 8,200.5. The spread is 1 point. If you buy at 8,200.5 and immediately close (sell) at 8,199.5, you’ve lost 1 point straight away, even though the market didn’t move.
That’s why every new trade starts slightly in the red. The price has to move in your favour by at least the spread before you break even. Spreads can widen sharply around big news releases, at the market open and outside main trading hours.
Worked example 1: a long spread bet on an index
With a spread bet, you choose a stake per point, for example £2 per point. Your profit or loss is:
Profit or loss = (closing price − opening price) × stake per point (for a long trade)
Hypothetical prices:
- You buy the FTSE 100 at 8,200.5 at £2 per point.
- If it rises: later the sell price is 8,240.5. Profit = (8,240.5 − 8,200.5) × £2 = 40 × £2 = £80.
- If it falls: later the sell price is 8,170.5. Loss = (8,170.5 − 8,200.5) × £2 = −30 × £2 = −£60.
Notice you close a long trade at the sell price, which already includes the spread.
Worked example 2: a short trade on forex
For a short trade the formula flips:
Profit or loss = (opening price − closing price) × stake per pip
Hypothetical prices:
- You think the pound will weaken against the dollar, so you sell GBP/USD at 1.3000 at £1 per pip.
- If it falls: you close (buy back) at 1.2950. That’s 50 pips in your favour = £50 profit.
- If it rises: you close at 1.3040. That’s 40 pips against you = £40 loss.
A note on CFDs: CFDs work on the same principle, but you trade a number of contracts or “lots” instead of a stake per point, and your profit or loss may be worked out in the currency the market is priced in (for example US dollars) and then converted. A standard forex lot is 100,000 units of the base currency. The maths is covered fully in Module 8: position sizing.
Leverage and margin: the part that catches most beginners out
This is the most important section in the lesson.
When you place a leveraged trade, you don’t pay the full value of the position. You put down a deposit called margin, and the provider lets you control a much larger position. The full value of the position is called your exposure (or notional value).
Hypothetical example:
- FTSE 100 at 8,200, stake £2 per point.
- Your exposure = 8,200 × £2 = £16,400. That’s how much money you’re effectively controlling.
- If the margin requirement is 5%, the deposit needed is 5% × £16,400 = £820.
Now look at what a fairly ordinary move does:
- A 2% fall in the index is 164 points.
- 164 points × £2 = £328 loss.
- That’s a 2% move in the market, but a 40% loss of the £820 you put down as margin.
That’s leverage. It magnifies both gains and losses compared with the deposit you put down. It’s the main reason beginners lose money fast. They see a “small” margin figure and forget the real size of the position.
UK leverage limits for retail clients
To protect retail traders, the FCA caps the leverage UK providers can offer on CFDs and spread bets, from 30:1 down to 2:1 depending on how volatile the market is (FCA PS19/18). Broadly:
| Market type | Maximum leverage | Minimum margin |
|---|---|---|
| Major currency pairs | 30:1 | 3.33% |
| Non-major currency pairs, gold, major indices | 20:1 | 5% |
| Other commodities, non-major indices | 10:1 | 10% |
| Individual shares | 5:1 | 20% |
Crypto derivatives can’t be sold to UK retail consumers at all (FCA). Clients who qualify as “professional” can get higher leverage but lose some protections. Beginners shouldn’t go anywhere near that.
The same FCA rules also require providers to:
- close out positions when your account funds fall to 50% of the margin needed to keep them open (a “margin close-out”)
- provide negative balance protection, so you can’t lose more than the money in your account
These protections help, but they’re a safety net, not a strategy. Hitting a margin close-out usually means you’ve already lost a lot.
The key lesson: maximum leverage is a limit, not a target. Professional risk management (covered in Module 8) usually means using far less leverage than you’re allowed.
Other costs to know about
The spread isn’t the only cost. Depending on the product and provider, you may also pay:
| Cost | What it is | When it applies |
|---|---|---|
| Spread | The gap between buy and sell prices | Every trade |
| Commission | A fee per trade, common on share CFDs and some “raw spread” accounts | Per trade, if charged |
| Overnight financing (swap) | A daily charge (or occasionally a credit) for holding a leveraged position past the provider’s daily cut-off | Each night you hold a position |
| Currency conversion | Converting profits or losses from another currency back to pounds | Markets priced in other currencies |
| Guaranteed stop premium | A fee for a stop-loss that’s guaranteed not to slip | Only if you use one and it’s triggered |
| Inactivity fees | Charged by some providers on dormant accounts | Varies |
Overnight financing (hypothetical example): Financing is usually based on your full exposure, not your margin. If a provider charged a hypothetical annual rate of 7% on the £16,400 exposure above, one night would cost about £16,400 × 7% ÷ 365 ≈ £3.15. That looks small, but held for three months it’s roughly £280. Always check your provider’s actual rates in its costs and charges information.
Costs add up, especially for people who trade often. A strategy that looks profitable before costs can easily lose money after them.
Work out your risk before you click buy
Here’s the habit that matters most: decide where you’ll get out if you’re wrong before you enter, and work out what that will cost you.
Risk on a trade = distance to your stop-loss × stake per point (or pip)
Hypothetical example: You buy the FTSE 100 at 8,200.5 at £2 per point, with a stop-loss at 8,170.5.
- Distance to stop = 30 points
- Risk = 30 × £2 = £60 (plus the possibility of slippage if the market gaps past your stop)
If £60 is more than you’re prepared to lose on one trade, the answer isn’t to remove the stop. The answer is a smaller stake. Working backwards from the amount you’re willing to risk to the right stake size is called position sizing. It’s the single most important skill in this course, and we’ll practise it in Lesson 8.3.
Putting it together: a pre-trade checklist
Before any practice trade on your demo account, write down:
- Market and direction: e.g. FTSE 100, long
- Entry price
- Stop-loss price and distance in points or pips
- Stake per point or pip
- Money at risk = distance × stake
- Exposure = price × stake (so you know the real size of your position)
- Target – where you plan to take profit, and the reward compared with your risk
- Costs – spread now, financing if you’ll hold overnight
If you can’t fill in every line, don’t place the trade.
Key takeaways
- Long trades profit when prices rise; short trades profit when prices fall. Both lose money when you’re wrong.
- Price moves are measured in points (indices, shares) or pips (forex).
- The spread means every trade starts slightly in the red.
- Leverage magnifies gains and losses relative to your margin: a 2% market move can be a 40% hit to your deposit.
- UK retail leverage is capped at 30:1 to 2:1, with margin close-out and negative balance protection, but these are safety nets, not strategies.
- Always calculate your money at risk and your total exposure before you enter.
Quick quiz
- You buy at 8,200.5 at £3 per point and close at 8,230.5. What’s your profit? (30 × £3 = £90.)
- You sell GBP/USD at 1.3000 at £2 per pip and close at 1.3025. What’s the result? (25 pips against you × £2 = £60 loss.)
- Why does a new trade start slightly negative? (Because of the spread.)
- FTSE 100 at 8,000, £5 per point: what’s your exposure? (£40,000.)
- What’s the maximum leverage on major currency pairs for UK retail clients? (30:1.)
Try this
On a demo account, open a small position on any major market and watch the profit and loss figure. Note that it starts negative (the spread). Then calculate your exposure and the margin used, and compare your numbers with what the platform shows. Close the trade when you’re done – the goal is understanding, not profit.
FAQ
Is leverage bad? Leverage itself is a tool. The danger is using too much of it. Keeping the money you risk on each trade small, whatever leverage is available, is how many experienced traders manage it.
Can I lose more than I deposit? For UK retail clients of FCA-authorised CFD and spread betting providers, negative balance protection means you shouldn’t lose more than the funds in your account. You can still lose all of those funds.
What’s the difference between a point and a pip? They’re both units of price movement. “Points” is normally used for indices and shares, and “pips” for forex (usually the fourth decimal place).
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. All prices, spreads, margins and financing rates in this lesson are hypothetical. Check a provider’s own costs and charges before trading. Read our full risk warning.