Advantages of CFD Trading For Traders

CFD means Contract for Difference.

There are various advantages of CFD Trading for traders.

Main benefits of this Trading are:

1. Trading on Margin: By using margins, CFD Trading gives an opportunity to the individuals involved to hold more value than they actually contribute. Contract for Difference allows the traders to get higher returns on the investment.

2. No purchase of assets is involved: In Contract for Difference Trading, traders are not required to purchase the assets. This trading involves an agreement between the broker and the trader. This agreement is related to the value of the asset and no purchasing is done.

3. Stamp Duty not required: In case of CFD Trading, stamp duty is not required. This is because there is no purchase involved.

4. Traders get Dividend: Another advantage for traders involved in this trading is that time to time they earn relevant dividends as well. This is possible only when you hold CFD position in an organisation at the time of the dividend pay out. When the stock of the product or the company will rise, the traders involved will also get benefits from it. With this principle, CFD gives trader an opportunity to earn dividend.

5. Interest gets credited: Brokerage firm pays interest to the trader on the money tied up in short position CFD.

6. Short shares ability: If traders are able to predict the movement of the shares i.e. that the share’s value will go down and the same thing happens, traders earn money. It is simple In case of CFD as in this situation; the trader has not actually purchased any shares. The trader earns money even when the share’s value goes down as they predicted something and it actually happened.

7. After hour facility: There are several CFD companies that allow its traders to actually purchase Contract for Difference even after the time is over. This plays a very important role for people who are in this trading for second source of income.

Day Trading CFDs

Discover how you can generate the highest returns over the shortest timeframe when Day Trading CFDs.

Today we’ll be looking at several ways to identify the best time frame for you when trading CFDs.

Uncover the secrets to finding your best time frame

Using Multiple time frames when doing your charting analysis is going to be essential to your success as a Day Trader. Maximising your entry will stem from using a short, medium and long term chart to focus on the best entry on your time frame.

As an example you may trade a 15 minute chart, so use a daily chart, 4 hourly chart and then the 15 minute to time your entry. Your challenge initially is to find the 3 charting timeframes that consistently locate winning trades.

How big will your CFD wins be?

The next major component is determining how big your wins need to be compared to your losses and this is referred to as your risk:reward ratio. CFD Day Traders normally have similar size wins to losses and traders need to be careful if the average size of a loss is greater than their wins. In order to be profitable you will need to ensure your percentage win rate is well over 60%.

What you need to concentrate on when Day Trading CFDs

A huge challenge for short term traders is overtrading. Many CFD Day Traders feel the need to be active even when opportunities do not line up offering the best risk:reward. By focusing your efforts on a risk reward ratio of 1.5 to 1 or even 2 to 1 you can build a brilliant edge in the markets that will definitely reward your efforts.

Overtrading is the fastest way to the poor house so avoid this detrimental activity at all costs.

CFD Broker -Direct Market Access

Top 3 Reasons to Use a Direct Market Access Broker When Day Trading CFDs

Day Trading CFDs requires a fast platform, the ability to execute your orders quickly and no requotes, especially if you are going to make any money. Today we are going to take a look at the top 3 reasons why you would want to use a Direct Market Access (DMA) CFD broker in order to day trade the markets.

1. No requotes

Since the introduction of Contracts for Difference around the world the Market Maker model has been dominating and one of the greatest frustrations of all traders is the annoying requotes that you get regularly. A requote is when you want to buy at say $2.40 but the CFD broker comes back and says ‘Sorry, that price isn’t available, would you like to deal at $2.42? Now you might be running a direction from the ASX and you can see there is volume there buy your Market Maker CFD broker won’t let you have it. This is incredibly annoying.

When you deal through a Direct Market Access CFD broker you never get any requotes as you are dealing straight into the liquidity of that local exchange. So when you go to buy at $2.40 and the volume is there then that is the price you get. Plain and simple.

2. Speed of getting orders set in the market

Another vital criteria when placing Day Trades online is the ability to execute quickly. Every second can mean a good deal of money, either won or lost, and can make the difference between a winning or losing trade. In order to ensure speed into the market you want to be using a Direct Market Access broker as they have what is known as ‘Straight Through Processing’ or STP which means you orders go direct into the market, not through a broking desk. These valuable seconds are critical to your success as an online day trader.

3. Transparency

Lastly you want to be able to see exactly what is going on and this is what we refer to as transparency. With a DMA CFD broker you can see exactly what is available in the market on both the buy and sell side and you can trust those figures to be real. That means when you want to buy 2,000 CFDs and there are 2,000 available, then you are able to get them, providing no-one else hits that price at the same time. You have the option of seeing all the individual buy and sell orders and you can see your order moving up and down the ASX queue too.

CFD Trading vs Traditional Share Dealing

 Many investment groups and hedge funds have found a great deal of success with CFDs for more than ten years in the ASX stock market as an alternative means of investment to traditional share trading.

If, for example, the margin on a Stock you are interested in was 10%, establishing a position of $100,000 would only require a deposit of $10,000. Any running profits that you make can actually be used as margin to esablish new positions but any losses would require extra funds.

While stamp duty on shares has in the opinion of some traders reduced the cost effectiveness of ‘day-trading’ traditional stocks and shares, CFDs are exempt and this seems to have added to their appeal. CFDs are liable to capital gains tax but losses can be offset against future profits for the purposes of tax. In the same way that you would buy shares, when you trade in CFDs the contract purchase is the same.. So if you wanted exposure to 1,000 shares in a company, youd have to sell 1,000 contracts .

 With CFDs the charges and commissions involved in a trade are not part of the spread, because of this, the CFD spread quote will be very close to the underlying price of the share or commodity that you are following. CFD’s also mimic almost every aspect of actually owning the underlying share or market, so if you hold a position long enough, you receive the benefit of any dividends being paid on the underlying shares.

CFDs will appeal to different trading styles. It’s important to note that they should not be regarded as substitutes for long term investment or saving, as more citizen try to take control of their financial destiny, theres been a growing realisation that going short is a legitimate means of trading in market.

Trade Futures With CFDs

Contracts for difference or CFD trading is a type of trading where traders can trade on a short term basis and get some profits out of it. CFDs profits or loss normally arise from the disparity in the charge of the future when and at the end of the buying period. Hence, the outcome depends on the performance of a share in the market. This is usually a contract between two people and depending on the position you have taken, you can either gain or lose. When trading CFDs you have two options in that you can trade long or short. Trading long means that you anticipate the prices will rise while trading short is when you expect the prices to fall.

When you decide to trade CFDs, you have to give a certain amount of money as commission for the trade. The commission normally depends on the value of the asset in question since it is a percentage of the value of the asset. CFD trading accounts give the advantage of being able to trade day and night. These trading accounts come with different features which make it very important for any trader to compare Cfds trading accounts to find the most efficient.

One way to compare CFD trading accounts is to look at the commissions involved when buying and selling. The other is to find any other underlying fees you may be required to pay for all your trades if any. You can also compare Contracts for difference trading accounts based on whether it is possible to trade on other investment options apart from futures and whether the account provides all the tools you will need in the trading process. The one thing that should give you more reason to trade Cfd is the fact that you get all advantages associated with leveraging.

Brokerage On Index CFDs – How Do CFD Brokers Make Their Money?

What is US Dollar Index. When anyone starts trading financial products for the first time, the trading costs involved are one of the most important criteria to consider. That is what makes trading index CFDs such a great product as they are generally commission free.

So the question most people ask is how can CFD brokers allow people to trade index CFDs commission free?

The reason CFD brokers allow you to trade index CFDs commission free is the fact that they have a spread on the index that you are trading. The spread is the difference between the first buyer and the first seller.

If we were to have a look at the Aussie 200 index for example the spread may be two or three points. The first buyer might be at 4000 and the first seller at 4002. As you can see there is a two point spread and so if we traded at one dollar per point then buying at 4002 and selling at 4000 would result in a two dollar loss. That two dollar loss is in effect your brokerage.

Trading Index CFDs

So as you can see there is no commission when trading an index CFD as in this example, but you will notice that if you got in and out when the market had not moved you would suffer a $2 loss. So whilst you may consider that you are getting the product commission free you are in effect being charged a small amount of brokerage. The great thing about this product is that the spread on an index CFD is usually kept to a minimum.

Free brokerage or $100 round trip?

There is no doubt that when you first starting out an index CFD at $1 per point is a brilliant option to consider. However, you can begin to see if you traded 25 contracts at 2 point spread your effective brokerage would be $50 to buy and $50 to sell making it a $100 round-trip.

Given the recent volatility of the Australian market and worldwide markets it becomes easy to see why one dollar per point is a very viable option. Even on the Australian market, which may move 100 points a day, at $1 per point you could be making or losing $100 a day.

Beware excessive overnight financing charges

The other reason CFD brokers are able to provide an index CFD commission free is that they charge an overnight financing rate which may be as high as the RBA rate plus or minus 4%. This means if you are holding an index CFD trade for a year you would be charged 4.25% +4% which equals 8.25% per annum calculated back as a daily rate. Always keep in mind that this financing rate is charged on your total position size which means it can get quite expensive allowing the CFD broker to pocket that finance. Find more information about Forex News Straddling Strategy here.

Do CFDs Suck?

Many novice traders blame CFDs for their losses and even may say CFDs suck. Losing money can trigger an emotional response and novice traders may blame someone else for losing money.

Losing money is not due to the use of CFDs (Contracts for Difference) it is the decisions that the trader made. It is very important as a trader that you take responsibility for your actions, both win and lose.

Leverage Is A Double Edged Sword

CFDs trade on leverage where a small amount of money down gives you access to a large position. This can result in very quick gains or losses as the market moves. If you lose money trading CFDs do not blame CFDs and say that CFDs suck.

Using stops on every trade is an important part of your risk management. If you do not use stops then you may not be ready to become a CFD trader.

CFD Brokers Deliberately Hit Your Stops

Some traders think CFDs suck because the broker knows where your stop sits and can then move the price to these levels. After hitting your stop the market then turns around and moves again in the direction you expected. Despite being correct you end up losing money.

CFD brokers are not inclined to chase your stops as they have other more important things to do. Sometimes a trade will hit my stop and reverse and at other times it will move very close to the stop and reverse. It can go either way. Place your stops thoughtfully and in a place where they will not be hit by normal movement.

All the traders in the market create the price movement and you are giving a CFD broker too much credit if you think they can move the market. Accept that you will be stopped out at times even if you have placed your stop correctly.

Re-quotes Rip Off Traders

It is possible to think that CFDs suck because you are re quoted a higher price when you try to buy CFDs through a market maker. Re-quotes are not a rip off they are used because the quantity you wish to trade can not be traded at the price level you specified. There is simply not enough volume in the underlying market.

The difference between the re-quote and the price you placed your order at is called slippage. This is accepted when buying stock as you may execute some of your order at one price and some at a higher price where there is sufficient volume. Your average price is then higher than your original order.

A market maker can only execute the whole order or none of it, partial fills are not possible, so a re-quote is provided at a price level that allows them to execute the complete order. Re-quotes are not about ripping traders off, but just reflect the underlying execution of the order.

Trading Is Your Responsibility

It is never the trading instrument that is the cause of bad performance it ultimately is the trader. There is no point in blaming the market, the broker, your partner or CFDs it comes down to your decisions.

A trader must take responsibility for his or her results and with this belief system in place it is possible for the trader to change their outcomes. If you think the rest of the world is driving you crazy, you will have to send the rest of the world to a psychiatrist for you to get better.

Source: Jeff Cartridge

Stock Vs CFDs

Which is better to trade CFDs or stocks? The answer to this question is not obvious and it will depend on what you want to get from trading. Looking at CFDs vs Stock we will highlight the key differences.

Cash, All or Nothing

When trading stock you require 100% of the cash to buy the stock. It is possible to borrow some of this money to invest using a margin loan, but you will still be required to provide at least 30% – 40% of the amount of stock you are purchasing.

CFDs require only a small amount of cash up front to buy stock, as little as 3%. The profit potential from CFD trading is much larger than stocks with returns of up to 15 times possible.

When it comes to making the most of your capital CFDs win easily against stocks.

What Happens When It Doesn’t Work?

The other side of leverage is risk as leverage amplifies both gains and losses. The most you can lose when investing in stocks is 100% of your capital, assuming you have not borrowed any money to invest.

It is possible to lose more than 100% of the money you invested in the first place with CFDs, so risk management is very important.

While it is possible to manage your risk when trading CFDs in the battle of CFDs vs Stock the lack of leverage when trading stock makes risk management much easier with stock.

The Cost of Doing Business

Brokerage and interest charges are the two main costs of trading when looking at CFDs vs stock.

CFDs are more expensive than stocks when you consider finance charges, because there is no interest charged on stock.

It will depend on the balance between higher interest costs and lower CFD brokerage costs as to which is cheaper CFDs vs stock. The longer a position is held the advantage will swing in favour of the stock holder.

No Tax, Is That Possible?

One of the reasons that CFDs were originally developed was to get around stamp duty that was payable on stock purchases. CFDs were exempt from stamp duty.

Australian traders will notice a difference between CFDs vs Stock when it comes to tax. There are no franking credits attached to CFDs and the 12 month capital gain discount also does not apply. There are tax advantages to stocks in Australia.

Tax advantages vary dramatically from country to country so it is hard to call a definitive ruling here in the battle of CFDs vs stock.

CFDs vs Stock, The Winner Is

In conclusion in the battle of CFDs vs stock there is no clear winner, it will depend on what is most important to you. CFDs offer more upside potential with less capital investment due to the leverage available. The risk associated with CFDs is higher because of the same leverage, so managing risk is more important to the CFD trader than the stock trader.

CFDs can be cheaper with low transaction costs and work well for the active trader. If you wish to hold a position for months or more then stock has an advantage as there is no interest cost to pay. I personally prefer CFDs as I actively manage my risk and CFDs provide access to bigger upside.

Source: Jeff Cartridge

CFD Trading Introduction

What is CFD?

CFD is the Contract for Difference that is traded, from which, person profits from the changes in prices of shares, indices, commodities, currencies etc. in market.

If person bought CFD on the share, which is $4.00 and price goes up to $4.40, then that person makes the profit. Thus, in case 500 CFDs were bought, then person will make $200.

And profiting from increasing markets CFD trader will as well profit from the falling market that is known as the “Short Selling”.

CFD’s are also traded on the leverage & are famous for this cause. Leverage CFD generates in stock market is 10:1 that means CFD trader will profit very fast without any need to buy & own shares. It as well means trader will profit from smaller rises or else falls in market because of this leverage.

Even if though you are a normal person you will learn CFD Trading by the different courses, which are accessible and make substantial revenue in case you learn system & become very good at the CFD trading.

Benefits of CFD Trading

Leverage

Leverage increases profitability of the trader’s potential investment by 10:1

Short Selling

Also profiting from rising market, and CFD trading allows trader to gain from falling market

Shorter Trade Times

Leverage of CFD allows CFD trader to make some profits from small movements in a market. It means CFD trading will take place over some days to weeks instead having to own share for years on end in order to make the descent return.

Capability to Set-up Stop Losses

Stop loss is an ability to set predetermined level to minimize CFD traders losses. For example, if CFD was bought at around $42 and trader is worried it may go down, stop loss can be placed at, $41.50 so that in case it trades at that stage trader can automatically sell out the position prior to it goes lower.

Trade in Evenings

Lots of CFD traders have got day jobs, and checking share during day is impossible. The CFD suppliers allow traders to put trades in evening when market is closed. With “if done” stop loss order, CFD trader will not need to look at market during day. This choice is fast as well as makes it simple to profit by using a CFD advantage on every day basis.

Markets

With contracts for difference you have a huge range of markets starting with share markets (including American, European and Asian market), commodities, currencies, indices, interest rates and much more. Just one broker gives you access to all those markets. Besides you can also trade futures or spots.

No Stamp Duty

When buying shares in the UK you have to pay 0.5% stamp duty on every transaction (no need to pay stamp duty when you sell shares). With CFD you do not pay stamp duty as contracts for difference are derived product and thus you do not buy actual shares.

Trade Futures with CFDs

Futures trading involves people making contracts where the payments for the commodity involved are to be made in the future at a specific time. Usually, the buyer and seller know the value of the asset and both of them agree when the exchange is to be done. Futures trading with CFDs is where the buyer does not have to completely buy and own the commodity. This way, you do not have any rights over the shares or commodities for which you trade.

Contracts for difference or CFD trading is a type of trading where traders can trade on a short term basis and get some profits out of it. CFD profits or loss normally arise from the difference in the price of the future when and at the end of the buying period. Hence, the outcome depends on the performance of a share in the market. This is usually a contract between two people and depending on the position you have taken, you can either gain or lose. With CFD trading, you have two options in that you can trade long or short. Trading long means that you anticipate the prices will rise while trading short is when you expect the prices to fall.

When you decide to trade CFDs, you have to pay a certain amount of money as commission for the trade. The commission normally depends on the value of the asset in question since it is a percentage of the value of the asset. CFD trading accounts are offered by a number of companies and most of them give the advantage of being able to trade day and night. Thus, traders can access the market during the night and find contracts. These trading accounts come with different features which make it vital for any trader to compare CFD trading accounts to find the most efficient.

Many traders who use CFD trading accounts normally want to get all the benefits of trading futures without the need to own them. Perhaps the good thing with trading CFDs is the fact that you can control losses easily. This is because you can exit from trading anytime when you feel the prospects of gaining are slim. Anyone can trade CFDs since they are not complex and the costs involved are minimal.

One way to compare CFD trading accounts is to look at the commissions involved when buying and selling. The other is to find any other underlying fees you may be required to pay for all your trades if any. You can also compare CFD trading accounts based on whether it is possible to trade on other investment options apart from futures and whether the account provides all the tools you will need in the trading process. The one thing that should give you more reason to trade CFDs is the fact that you get all advantages associated with leveraging. This type of futures trading is quite common nowadays and this is because of the many advantages it provides.

Compare CFD Brokers And CFD Providers

When it comes to CFD trading, a CFD broker or provider is a person who works through online, uses electronics CFD platforms that makes CFD trading mobile and will help you to develop your trading routine within a shorter period of time. It is wise to compare CFD providers before joining.

Unless you have any enquiry or need assistance with a particular order there is no need to directly communicate with the broker. A full service CFD broker would provide you more information than the cut-price online CFD brokers. Now, here we will see how to select a CFD broker or trader. One way to learn about CFD brokers is by asking an experienced trader if you know someone or met while doing a CFD trading tutorial course. Regardless of which CFD broker you choose to trade with, consider the following factors to make sure that they are well established in their profession they are offering you the features that you are looking for. A good way to have some idea about the CFD providers is by trying out a demo account with them to test their trading platform.

Online CFD Brokers: Things you Should Compare

Margin Requirement

Usually CFD brokers come up with margin requirement that remains within 5-20%. Many providers keep it at 10%, thus offers around 10 to 1 leverage. However, depending on the turnover of a particular CFD, some CFDs require a margin around 20-70%.

Broker’s Commission

The commission depends on the CFD provider. Usually it remains within 0.1 to 0.2% of the size of your trade each way with a minimum commission of around $10-25. However, these commissions are negotiable especially if you are a regular CFD trader. So always ask the broker about it.

Information regarding CFDs

When it comes to choosing a broker, it is important that you take necessary notes regarding their CFD offerings. In general, it is important that you have access to a large number of CFDs when you are using trading systems that are designed to be traded on for instance, the top 200 or 300 CFDs, than if they are programmed to execute trade on the top 30 or 100 only.

If you are trading a system that is designed for a certain amount of CFDs to generate profits then you need to make sure that the number of CFDs that are available is sufficient, or else you may have to redesign your system. You can backtest your system with the current list of CFDs that are provided by the broker that you are interested to trade with. This will help you to develop a system that is more applicable in real life scenario.

Types of CFD Orders

There are many online CFD brokers available who offers the opportunity to the traders to place their orders after the market time is over. So, if are working at office during the day time and willing to place orders during the evening or at night then this is something you need to look for in the offerings of a CFD provider.

However, some brokers might require you to place the orders while the market is open. This depends on your trading strategy and system.

Avoiding CFD Risks, The Path To Trading Success

The main CFD risks is the impact of leverage when trading CFDs. With leverage available up to 20:1 you can make a lot of money very quickly and also lose a lot of money very quickly.

Stops Can Control Your Risk

Stops work very well to limit your CFD risk. Place your stop at a price that will control the loss per contract to an acceptable level. This is an effective way to manage your risk.

A stop loss will exit you from a trade with a predetermined loss on the trade. Without a stop the loss could be much larger. If you entered a trade at $12.50 and placed your stop at $12.10 your loss on one contract is set at 40 cents.

Too Big, You Loose

By placing your stop at a predetermined level the amount you lose will now depend on your position size. The more contracts that you hold the more money you will lose if the trade goes wrong. This is the second CFD risk that you can manage.

with 30 cents at risk the number of contracts will determine your gain or loss. 100 contracts would give a loss of $30, 200 contracts would lose $60 and 1000 contracts would lose $300. Bigger positions, say 10,000 contracts would lose $3,000. Correct position sizing is an important aspect of controlling CFD risk.

A Gap Away From Disaster

A stop does not cover you against all CFD risks. It is possible for a share to gap over the stop resulting in a larger than expected loss. Your stop may have been placed 40 cents form your entry, but the share never traded at that price, instead jumping over your order to create a bigger loss of 60 cents. There are a few techniques you can use to minimise the impact of gaps.

Control your position size

Most Destructive CFD Risk

The biggest risk when trading CFDs is however not related to stops or position sizing, it is instead you. Controlling your own emotions is vitally important to prevent placing a position that is too big or to move stops to prevent you losing money. If you follow either of these strategies you will inevitably lose.

Managing your risk is the key to your success and profiting from CFDs.

Aspects of CFD trading

It has been mentioned that CFD trading is very similar to share trading, and in most respects the two are almost the same. CFDs, however, have distinct features that differentiate them and make them attractive to traders and investors alike.

These features include:

Leverage

In the financial market, leverage means the use of borrowed money to put into investment products such as property, shares, property trusts or managed funds. A common example of using leverage is people borrowing money (from a bank or financial institution) to invest in a residential or investment property. This results in a mortgage for a home loan or an investment loan. People may also borrow money to buy shares. This is commonly known as taking a margin loan to invest in a share portfolio.

Trading CFDs is similar to taking a margin loan because when you trade a CFD you are paying only a small portion or percentage of the total value upfront in the form of a margin payment. The full amount is loaned to you by the CFD provider. It is this full amount upon which your financing charges will be calculated. Margin trading means that you only need a small percentage of your trading capital to open up larger or more positions than you could normally open if you were trading shares.

Some CFDs require as little at 5% margin, some 10% and others 20% or more, depending on the CFD. For many investors and traders, being able to trade on margin (using leverage) is the biggest attraction of CFDs, as it increases the opportunity to profit while using less capital.

Nevertheless, the ability to trade on margin can be a double-edged sword, in that it both magnifies potential profit and losses. When used wisely and appropriately, however, trading on margin can be a big boost to profitability and capital building.

Flexibility

Two of the more attractive elements of CFDs are cheap commission and low margins. But that’s not the whole picture. You shouldn’t forget about the tremendous flexibility they offer. Flexibility is what allows you to keep making money no matter what market conditions are like.

One of the key features of share CFDs is the ability to trade on both the long side and the short side of the market.

Short selling occurs when your opening trade is a sell order. If the price of the share falls and you close the position (with a buy order), your profit is the difference between the two. As you can see, this enables you to benefit directly from a falling share price.

While not always the case, traders generally will not want to have their trading portfolio either entirely long or entirely short. If you structure your trading portfolio this way, the day-to-day oscillations of the market can have a marked impact on the value of your portfolio. While it is easy to talk about portfolio volatility, it becomes more of an issue when you have real capital invested.

You’ll probably find there are long and short opportunities regardless of the prevailing market conditions.

Naturally, in a bear market there will be more opportunities on the short side than on the long side, but it’s best not to focus exclusively in that direction. Even though the market has been consistently bearish for some time, if you were too heavily short at the wrong time you could easily have suffered some significant draw downs due to bear market rallies that have occurred.

To illustrate this it’s worth considering some statistics. In 2008, the ASX/200 index fell by 41.29% – which we can comfortably say is a very strong bear market. However, over this period the index rose on nearly 45% of trading days. What this shows is that being heavily short would probably have been profitable, but the volatility you would have experienced would have been quite high over the course of the year.

This is where a difference can be seen between the short-term trader and the investor:

a. For the investor, the idea of weathering the ups and downs of being in the market is all part and parcel of the business.

b. For the trader, the objective is to try and capture smaller moves of the market and then exit. Timing remains an all-important component of survival for traders.

The conclusion you might draw (and probably should) is that being directionally wrong for even a short time can be expensive.

CFDs can be traded long or short

When you buy a CFD (go long), you’re expecting its price to go up so that you can sell it later at a higher price, for a profit.

When you sell a CFD (go short), you’re expecting its price to go down so that you can buy it back later at a lower price, for a profit.

Being able to trade long or short is one of the most attractive features of CFDs. It means that you can trade long with the aim of making money on a rising market, or trade short looking to make money when the market is falling.

Short selling physical shares is a complex and more costly procedure compared to short selling CFDs. NB Not all instruments can be traded short.

Dividends and corporate actions

For many long-term investors, dividends remain one of the determining factors in whether they invest in a particular share or not. Therefore, dividends can be considered important when deciding which stock to buy.

When you trade share CFDs on dividend-paying shares you will automatically be paid the dividend when you have a long position. The dividend payment is usually reflected on your trading account on the day of its announcement. On the other hand, if you have a short CFD position during the announcement of the dividend, the amount of the dividend will be deducted from your trading account. Other corporate actions such as bonus issues and share splitting are also automatically reflected on your CFD trading account as soon as they’re implemented.

Reporting season

The reporting season refers to the time of year when publicly listed companies update the market about their half yearly and yearly performance. It is also usually the time when companies announce whether their profit forecasts are on target.

Depending on a company’s performance and projected profit, the reporting season can result in volatility within the market. For example, if a company issues a forecast that its earnings will be lower in the next half year, the share price might fall the next day as investors may be disappointed with this result. On the other hand, if a company doubles its income and profit expectation for the coming year, the share price may jump higher as investors and traders take advantage of the good news.

As CFDs mirror the price of the underlying share, movement in share prices during the reporting season will also be reflected in CFD prices. This means that as a trader or investor, you have to be aware of the possible impact of the reporting season on your CFD positions. NB Reporting seasons vary from market to market.

Product trading times

The advent of the internet and online trading means that traders and investors now have access to international markets almost 24 hours a day and not only during market hours in Australia.

Another aspect of CFD trading involves the expiry date or length of holding time. Unlike other derivatives that have expiry dates and become worthless upon expiration, CFDs don’t have an expiry date. This means you can hold CFDs for as long or as short a period as you like.

Short-term traders may trade CFDs for a few days, while medium- to long-term investors and traders may trade them over a few weeks or months.

Lower brokerage costs

Compared to the brokerage fees payable when you trade with a regular stock, commission charges when trading CFDs are relatively low.

Instead Of Stocks, Trade A CFD

The difference between where a trade is entered and exited is the contract for difference (CFD). A CFD is a tradable instrument that mirrors the movements of the asset underlying it. It allows for profits or losses to be realized when the underlying asset moves in relation to the position taken, but the actual underlying asset is never owned. Essentially, it is a contract between the client and the broker. There are several major advantages to trading CFDs, and these have increased the popularity of the instruments over the last several years.

How a CFD Works

If a stock has an ask price of $25.26 and 100 shares are bought at this price, the cost of the transaction is $2,526 cash outlay from the trader. With a CFD broker, often only 10% margin is required so this trade can be entered for a cash outlay of only $252.6.

It should be noted that when a CFD trade is entered, the position will show a loss equal to the size of the spread. So if the spread is five cents with the CFD broker, the stock will need to appreciate five cents in order for the position to be at a breakeven price. If you owned the stock outright, you would be seeing a five cent gain, yet you would have paid a commission and have a larger capital outlay. Herein lies the trade off.

If the underlying stock were to continue to appreciate and the stock reached a bid price of $25.76, the owned stock can be sold for a $50 gain or $50/$1263=3.95% profit.

At the point the underlying stock is at $25.76 the CFD bid price may only be $25.74. Since the trader must exit the CFD trade at the bid price, and the spread in the CFD is likely larger than it is in the actual stock market, a few cents in profit are likely to be given up.

Therefore, the CFD gain is an estimated $48 or $48/$126.30=38% return on investment.

The CFD may also require the trader to buy at a higher initial price, $25.28 for example. Even so, the $46 – $48 is a real profit from the CFD, where as the $50 profit from owning the stock does not account for commissions or other fees. In this case, it is likely the CFD put more money in the trader’s pocket.

The Advantages:

Higher Leverage

CFDs provide much higher leverage than traditional trading. Standard leverage in the CFD market begins as low as a 5% margin requirement. Depending on the underlying asset (shares for example), margin requirements may go up to 50%. Lower margin requirements mean less capital outlay for the trader/investor, and greater potential returns. However, increased leverage can also magnify losses. (For more, see The Leverage Cliff: Watch Your Step.)

Global Market Access from One Platform

Most CFD brokers offer products in all the world’s major markets. This means traders can easily trade any market while that market is open from their broker’s platform.

No Shorting Rules or Borrowing Stock

Certain markets have rules that prohibit shorting at certain times, require the trader to borrow the instrument before shorting or have different margin requirements for shorting as opposed to being long. The CFD market generally does not have short selling rules. An instrument can be shorted at any time, and since there is no ownership of the actual underlying asset, there is no borrowing or shorting costs.

Professional Execution With No Fees

CFD brokers offer many of the same order types as traditional brokers. These include stops, limits and contingent orders such as “One Cancels the Other” and “If Done.” Some brokers even offer guaranteed stops. Brokers that guarantee stops either charge a fee for this service or attain revenue in some other way.

There are very few, if any, fees for trading a CFD. Many brokers do not charge commissions or fees of any kind to enter or exit a trade. Rather, the broker makes money by making the trader pay the spread – to buy, a trader must pay the ask price, and to sell/short, the trader must take the bid price. Depending on the volatility of the underlying asset, this spread may be small or large although it is almost always a fixed spread.

No Day Trading Requirements

Certain markets require minimum amounts of capital in order to day trade, or place limits on the amount of day trades that can be made within certain accounts. The CFD market is not bound by these restrictions, and traders can day trade if they wish. Accounts can often be opened for as little as $1,000, although $2,000 and $5,000 are also common minimum deposits requirements.

Variety of Trading Options

There are stock, index and commodity CFDs; even sector CFDs have emerged. Thus not only stock traders benefit; traders of many different financial vehicles can look to the CFD as an alternative.

The Disadvantages

While CFDs appear attractive, they also present some potential pitfalls. For one, having to pay the spread on entries and exits eliminates the potential to profit from small moves. The spread will also decrease winning trades by a small amount (over the actual stock) and will increase losses by a small amount (over the actual stock). So while stocks expose the trader to fees, more regulation, commissions and higher capital requirements, the CFD market has its own way of trimming traders’ profits by way of larger spreads.

The Bottom Line

There are many advantages to CFD trading including lower margin requirements, easy access to global markets, no shorting or day trading rules and little or no fees. However, high leverage magnifies losses when they occur, and having to continually pay a spread to enter and exit positions can be costly when large price movements do not occur. CFDs provide an excellent alternative for certain types of trades or traders, such as short and long-term investors, but each individual must weigh the costs and benefits and proceed according to what works best within their trading plan.

Source:Cory Mitchell

High Probability Trading Strategies Using CFDs

High probability trading strategies for CFDs are highly desirable. These strategies are easier to trade because they provide more winning trades.

The impact of leverage is not as great as these strategies are less likely to have losing streaks so the drawdown is reduced.

High probability trading strategies are not necessarily the right direction to focus on with your research.

Trading Is Not About Being Right

The success of a trading strategy is dependent on two factors, how often the strategy wins and the risk reward of the strategy. It is the combination of these two factors that determines the results, not one of them in isolation.

Consider the following trading strategy that is profitable 95% of the time. The strategy wins $100 on each profitable trade, so from 100 trades the strategy makes $9,500 trades on average. But what happens on the other 5% of the trades.

If the average loss is $2,500 then the strategy loses $12,500 based on 5% of the 100 trades. Even though this strategy is right very often it still loses money. It is not one or the other measure in isolation, it is the combination of win% and the risk reward.

You Will Still Have Losses

The strategy that is often used to get high probability trading strategies is to use wide stop losses and small profit targets. One hot selling product is FAP Turbo, the forex trading robot, that uses this idea to achieve a hit rate of 95%.

All goes well until you experience a series of large losses. The losses can be reduced by tightening the stop loss, but this is very likely to reduce the number of times the strategy wins.

Balancing The Tradeoff

Finding an optimal relationship between the level of the stop loss and the success rate of the strategy requires testing the idea to determine the trade off between risk/reward and success rate.

Testing chart pattern breakouts I found the best trades breakout and keep going. With this entry idea a tight stop can be used to gain better results by giving a higher risk reward. Testing profit targets also gave interesting results improving the win%, but reducing the profitability overall.

Make Money First, Be Right Later

A trend following strategy is right around 30% of the time, but when it does win it wins big, with a risk reward of 3 or more. This is a profitable trading strategy.

A short term scalping strategy that wins 70% of the time with a risk reward of 1:1 is also profitable.

In the pursuit of being right and chasing high probability trading strategies, remember to ensure that trading is about making money, not being right.

Source: Jeff Cartridge

CFD Trading: Going Long – Making a Profit

In this CFD trading example we will be going long and making a profit. Going long means you buy a CFD to open your position with the view of making a profit from the increase in price of the underlying security. You realise the profit by selling at a higher price than the price at which you bought your CFD.

Let’s commence our profitable Share CFD trade example; note that these are all automatically calculated by your CFD provider, the example is used to illustrate the mechanics of your trading accounts’ inner workings.

Let’s say you’ve got $10,000 in your trading account with no current open positions. You spot a trading opportunity for a CFD for XYD Widgets Company and you decide to enter in the trade.

The XYD CFD is quoted at 30.00/30.02 (bid price/ask price). You decide to buy 2,000 XYD Share CFDs at the offer price of $30.00. At this point your broker may have fees deducted from the trade: let’s say the broker’s commission is at 0.1% of the trade so: 2,000 Share CFDs x $30 x 0.1% = $60 commission.

Your trading account is currently at $10,000 – $60 = $9,940. Your margin requirement for holding the CFD position currently stands at: 2,000 CFDs x $30 x 10% (say XYD has a 10% margin requirement by your CFD broker) = $6,000. Therefore your total margin requirement for holding XYD CFD is $6,000. And therefore your total free equity in your account is: $9,940 – $6,000 = $3,940. (Free Equity which is available for you to trade with minus margin requirements).

You hold the position overnight and the next day you are charged with a financing fee: (Number of CFDs held * Closing price * Financing Rate / 365). Your account finished the day at $9,940. The financing charge is: (2,000 x $30) x 5% / 365 = $8.22.

Before we complete the calculation – say the share price gapped at opening to $31.00/01 you would have earned some profit: ($31-$30) x 2,000 = $2,000. Therefore your CFD Trading account now stands at $9,940 – $8.22 + $2,000 = $11,931. At this point you can also calculate your margin requirements and your total free equity.

Later that afternoon you decide to exit your CFD trade and you close off you position by selling your XYD Share CFDs at the bid price of $31.00.

We will now calculate your total equity. When you close a position you have a 0.1% commission to pay: 2,000 CFDs x $31.00 CFD price x 0.1% commission = $62.

After you sell your position you are no longer bound by any margin requirements. Once you have completed your trade, your CFD trading account will now have: $11,931 – $62 = $11,869. Total profit from the single long Share CFD trade after all the fees and charges is $11,869 – $10,000 = $1,869.

Introduction to Day Trading CFDs

So if you are planning to go for CFD day trading rather than trading through long term CFD positions then this article will provide you the introduction that might help you to determine whether CFD day trading is going to be suitable for you or not. You will find out a few of the benefits and also the downside of focusing on intraday trading of CFDs.

Introducing the benefits of Day Trading CFDs

Now there are several benefits of Day trading CFDs. This includes:

1.It doesn’t involve any overnight risk. This means you don’t expose yourself to the risk of a stock or share and hence the CFD gapping up or down overnight. If the gapping happens against you, then there is a scope for you to exit at a position at a higher price than your intended exit.

2.There is no interest cost. If you trade the CFD within the day and don’t rollover your trade to the next day, you don’t incur any interest costs.

3.You can get short term results from CFD day trading. Since you are in the position for a shorter period of time, you can easily rely on short term cash flow if you want to.

Downside to Day Trading CFDs

However, CFD day trading does have some difficulties as well. These are:

1.You will need to trade shorter time frames. Means you need to monitor the screen at a regular basis. The process is usually more time consuming.

2.It is important to have a very good idea about your system since you will have to make quick decisions about your trades.

3.Typically will catch smaller moves. So in order to make larger amount of cash, it is necessary to go for bigger float or use more leverage.

Now after going through all these factors, if you think day trading will suit you, then consider attending a day trading course with an experienced trader who uses price action and indicators to establish a strong trading system. CFD day trading might look more exciting if you enjoy looking at the movement of the stock prices and if you can effort the extra time trading. Day trading is simply another time frame.

How Much Margin Do I Need in My CFD Trading Account?

When trading CFDs, your CFD broker requires you to have a certain amount of cash equity in your CFD trading account. When you open a CFD position, your trading account must have enough cash to fund their margin requirements. Your CFD provider’s margin requirements are typically listed on their website or in their Product Disclosure Statement.

The mathematical equation for calculating your margin requirements is: Margin Percentage x (Contract Quantity x CFD Price) = Margin Requirement. For example, your margin requirements when opening a long position for Telstra (TLS) for 1,000 Share CFDs at $3 with a margin of 10% would be: 10% x (1,000 x $3) = $300. $300 would be your margin required.

Your margin requirement for your CFD position is a dynamic number. As the price of the underlying security fluctuates, your margin will also change.

CFD Trading Platform Checklist

Now there are few things that you need to look for in a CFD trading platform that is offered by a broker.

1.Check out whether it allows you to place limit or stop orders to go in a CFD position in the evenings

To enter a CFD position next morning, you may want to place an order in the evening. This is helpful for those people who works during the day time do their trading in the evening. These orders to enter a CFD are typically done with limit orders. Some providers will allow you to stop entry orders too.

In case of the limit orders, it is important that you check that they be placed on either side of the market. For instance, a CFD trader may feel interested to place a limit order for buying at a limit price of $5.50. This is above the latest closing price of say $5.30. If the market trades at $5.50 in the following morning or below that, he or she will enter the position. It is a method of placing an order to assist to ensure you enter the position, unless the price gaps up the next morning above the limit price of $5.50. So, if you trade the system following this strategy, Make sure that you can place them in the evening and can them at a limit price which is above the last trade price.

2.See if the market orders are available both during and out of the market hours

You find some CFD providers’ CFD trading platform who will allow you to place order during a time when the market is closed so that you can enter a position at the opening price when the market opens. This can be done by a “market order” when the market is closed. It is also termed as “enter at open” in some platforms. Some brokers will allow you to enter a CFD only when the market is open. In such cases, you will have to monitor the market while it is open. However, the time depends on the location of the market. If you are trading overseas, then the market hours can be in the afternoon or night instead of in the morning.

3.See if you can place stop orders for entering a position

Stop loss orders are used in trading systems to enter a trade which are termed as “stop entry orders”. This means, if you place a stop buy order at $5.50, and then you would enter the position when the stock trades at or above $5.50. Some trading systems allow the trader to execute their trades in the evening. This is very much suitable for those people who have to attend their work place in the day time. You need to check out whether the platform is restricted for only market hour trading.

4.See how the stop loss order is placed for your trading

One of the greatest benefits of CFD trading is it allows a person to place stop loss orders that works automatically. When choosing a CFD provider, check out the details of order placement for stop losses. The trading system that you are using will determine the type of stop loss order. For instance:

a) Are you allowed to place an “if done” stop loss order that is linked to a awaiting order to enter a CFD?

If the answer is yes then you can place your order to enter the CFD, and its stop loss at the same time every day. People who work during the day time find this very much helpful since this allows them to execute all their trades in the evening. There are two kind of “if done” stop loss available:

One is that you can specify the stop loss at a particular price if you are using a limit order to enter a CFD. And the other one is if you are going for a “enter on open” type of order, can specify stop loss at a particular distance from the entry price, regardless of the entry price. What you can or cannot do will depend on the provider. So before choosing a broker, have a look at their website and if you need more details then contact with them for more information.

b) See whether there is any limitation or restriction for placing stop losses based on how far the stop loss can be from the entry price. Some providers will allow you to trade without such limitations where some might require you to maintain a minimum distance.

c) You need to keep one thing in mind, when you are going for placing market order in the day time; normally it will require you to place the stop loss right after entering the trade. So in that case, the above mentioned points won’t be applicable for you apart from checking how far from the current price spread you can place your stop loss order.

5.Have a closer look at the charts

Some CFD traders would prefer to use the charts on the platforms that the brokers come up with in order to modify their own entries. This is more useful in case of day trading. On the other hand, many traders go for systems that don’t require them to be there at all when the market is open. Charts are not used in such cases. However, in order to have a clear idea about the market condition, it is necessary to have an effective chart for assistance.

6.Check out the account management log book

While choosing a trading platform, it is important that you take a look at the account management log book of the platform where you will keep track of your account, your profits and losses from trades along with the costs of trading such as commissions and interest charges or payments. This should be quite clear and easy to understand. When it comes to CFD trading, choosing the right platform is as important as selecting a reliable and efficient broker. You can practice placing orders through different provider’s demo CFD accounts and trading platforms before starting you career as a trader.

Tips for CFD Trading

CFD trading is very much similar to doing business. This should not be seen as gambling unless you have too much money in your pockets that you are not worried about losing. However, due to leverage, there is a chance of losing more than your actual cash float in case you are not using stop loss properly and don’t have well structured money management rules. Share price going down to zero for some reason can also be a reason behind the loss. So it is important that you treat it as a method activity where you use a trading system to generate profit form your trades.

Before starting your trading career, go through proper training to learn how to trade the right trading system. In order to execute your trades properly, you need to increase your level of knowledge and do some practice as well to design or learn using a good system.

You need to keep one thing in mind; all trading systems come across both winning and losing trades. The most important thing to make profits overall is trading a profitable trading system. In your early days in CFD trading, there is a good possibility that you will face some losing trades. However, despite the fact that number of losing trades is often more than the number of winning trades, the size of the winners are considerably larger than the losers. In order to survive in the market, you need to have a clear idea about the mechanism of your system.

Make up your mind whether you want to learn a systematic trading system or want to go for a discretionary one. You will find courses for both of them. In case of part discretionary systems, you need to do some paper trading in order to prove that you are good enough to trade that system profitably. Someone performing well with that system does not necessarily means you will do the same with it.

On the other hand, systematic trading systems are much easier to follow. So you don’t have to spend a whole lot of time on screen trading. You can backtest multiple trading systems and select the one that performs best. However, keep in mind that its high performance on the past results is not going guarantee good result for future trades.

As a trader, you need to put a lot of emphasise on risk and money management. Despite this should be a part of your backtesting procedure, surprisingly many people ignore its importance and may proceed without having a money management.

In order to measure the performance or effectiveness of a system, you need to look at the yearly profits based on the percentage of your cash float, the maximum historical drawdown (as a percentage of your cash float), the steadiness of returns (consider the size of returns of multiple years) and finally the profit-loss ratio in combination with win-loss ratio.