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.

CFD Trading Mechanics: The Calculations

Lets assume that you bought CFDs when the price was $5.50. Since the trade size that we are working with is $8000, the number of CFDs that was bought would be 8000/5.50 = 1454.

Let’s continue with this CFD tutorial. Now let’s assume that the stop loss was set at $5.25, means that if the price falls to or below the $5.25 mark, we will exit this trade at a loss. Assuming that the trade goes well and that the CFD price of the CFD is now $5.75 and we have trailed the stop up to $5.40. A trailing stop refers to the stop that shifts in the direction of our trade (up for long positions) when the trade goes in our direction. Now if the price goes up to $6.00 and our trailing stop is moved to $5.90 then when the price of the CFD will fall, our stop loss will exit us from the trade at $5.90. The whole trade took about 12 days.

So, the difference between the entry and exit price is: $5.90 – $5.50 = $0.40

From this, we can calculate our gross profit = (difference between entry and exit price) x (number of CFDs) = 1454 x 0.40 = $581

Now that we have our gross profit, it is time to calculate the costs to find out the net profit.

Cost = commission + interest

First we will calculate the commission and then interest.

Assuming that we will have to pay $15 in and $15 out or 0.15% of the size of the trade. The one that is greater is needed to be taken under consideration. Here we will take the first one since this is greater. So, the commission would be $15 + $15 = $30

Also, assume that the interest rate charge for the provider for long positions held overnight is 7% or 0.07 per annum. In order to find out how much this is in case of our trade, we need to make it “pro rata” (times it by the days in trade, then divide by 365), and then will have to multiply it by the size of the trade.

Interest = (interest rate for long position) x (days in trade/365) x (trade size) = 0.07 x 12/365 x 8000 = $18.41

So our net profit is going to be: Gross Profit – (commission + interest) = $581 – (30 + 18.41) = $532.59

So, here goes your first CFD trade with all the calculations. Note that the trade that we have described above is completely hypothetical and not taken from any particular system.

You need to keep in mind that in case of short positions, interest costs are paid to you, not charged, so this will offset the costs rather than contribute in it. The actual figure for interest payment is usually a bit more complex than the way we have illustrated it in this example due to the fact that the interest rate is not calculated from the value of the trade size during the entering or exiting the position but at a daily basis from the value of the trade size at market value. For example, if we consider the interest cost based on our final trading size which is 8532.59, the interest would be $19.63. So you can see there is not much of difference in between. So we can say that the actual interest cost would be within the range of $18 and $19. This is how the CFD trading is executed. Here you have learnt how the leverage works along with the calculation of the costs that are involved in CFD trading.

CFDs Suck, Is This True?

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”

Contracts for Difference (CFDs) are a leveraged product and leverage means that money can be made or lost very rapidly. The fact that a trader lost money using Contracts for Difference (CFDs) does not mean that CFDs suck.

If you do not yet have the discipline to use stops on every trade and to manage your risk, then maybe you are not ready to trade CFDs.

“The Broker Knows Where Your Stop Is”

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.

The market will move where it chooses to and a CFD broker cannot move the markets. It would take enormous amounts of money to do this. Sometimes your stop loss will be triggered, even if you placed it perfectly.

“Re-quotes Are Unfair”

Market makers can re-quote prices if the market moves rapidly from the current price or there is not enough volume at the underlying price to trade a position. New traders often think they are being ripped off and consequently that CFDs suck. You are not being ripped off the market maker is simply quoting you a price at which the whole order can be executed.

Slippage is the difference between what you pay to enter a position and what you wanted to pay. Slippage is an accepted part of buying stock and occurs because there is not sufficient volume at the price you wish to pay. You end up paying a slightly higher price to get the quantity that you want.

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.

“Take Responsibility for Your Trades”

It is wrong to blame CFDs as the cause of bad performance, it is always the trader. Just as blaming the market is futile, saying CFDs suck does not address the underlying cause of the problem.

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.

Basics of CFD Trading

CFD is a contract or agreement between a broker and a trader that works on the opening and closing price of the shares. The word CFD stands for “Contract for Difference”. The basic idea of CFD trading is making profit from changes in the price of stocks and shares.

Let’s take an example to understand the concept more clearly. Let’s say you bought CFD on a stock that is $5.00 and then the price rises to $5.50. If you sell the CFDs now, you will be making a profit worth of $500 minus the costs. You can also go for short selling of CFDs and make profits while the market is falling.

CFD trading is done on leverage, which is why it has become such a popular trading product. Usually the leverage is about 10:1. This means through this kind of trading, you can make larger profits with smaller float. However, the trading results are overstated. So if your system is making a certain amount of loss in a year without any leverage then this will be multiplied when you are using leverage.

Advantages of CFD Trading

There are quite a few advantages in choosing to start CFD trading. Among the advantages, you have access to leverage of your trading account, allows easy access to short trades to avail you to more opportunities and also features the usage of stop losses gives you options to protect your trading capital.

CFD’s Mean Leverage

Leverage boosts the profitability of CFD trading up to 20 fold. For instance, in case of 10: 1 leverage, a trader can buy CFDs worth of up to $50,000 with a fund of $5000. Now, if you are trading with a system that generates a certain amount of profit without using leverage then with leverage you will generate a return that is magnified.

CFD Trading Allows for Trading Long and Short

While doing CFD trading, you can go for both long and short trading. How much you will be able to short the CFDs depends on the broker. Some CFD trading brokers will allow you to short a major portion of the CFDs that they will provide on the other hand some will allow you to short a smaller portion. Since in case of short trading you can make profit from both rising and falling stock prices, this trading approach can boost up your profitability significantly with some trading systems. So you can make profit from both bull and bear market.

You can Trade Shorter Time Frames

In case of CFD trading, you can make money from smaller moves in the underlying stock prices due to the opportunity to short CFDs and because of the availability of leverage. You don’t need to hold your positions for a longer period of time to make profit from your trades. For instance, you don’t need to hold onto some stocks for months in order to make profit from trading but instead you can trade systems even when you are in trading for only a few days or weeks. This is why you will notice a smoother and more consistent growth equity curve for your trades.

Usage of Automatic Stop Loss

Another great advantage of CFD trading is it allows you to place automatic stop losses on your trading platforms something that is not available in case of stocks. The main advantages of this particular option are:

First of all this will allow you to close a trade automatically “intraday” rather than looking at the end of the day to find whether the price of the stocks has exceeded your stop loss, before exiting the following day. This helps the system to generate more profit by allowing you to avoid the slippage. Secondly, using automatic stop losses makes it a lot easier for a trader to use a mechanical system since the exit is done automatically. This again will increase your profitability if you are dealing with a profitable trading system.

Time Flexibility

This kind of trading allows a person to execute trades even in the evening. It is almost impossible for people to place trades and exit them in the day time if they are attending to their work place throughout the day. Some CFD providers will provide you the opportunity to place trades in anytime of the day and night. So in the evening when the market is closed, you can still place an order to enter CFD and “if done” stop loss order as well, all at a time. And you don’t even have to keep your eyes on the pc throughout the day for trading. The whole trading routine will take much lesser time.

Types of CFD Trading Orders

CFD Market Order

The CFD market order that refers to buying and selling CFDs as quickly as possible in the best market price that is currently available. In case of some providers, you will be allowed to place market order when the market is closed, and therefore will allow you to get in when the next trading session.

CFD limit order

The order under which you buy the CFDs during a time when the price trades at or below that limit price is called a CFD limit order to buy CFDs at a limit price. On the other hand, the order under which you sell the CFDs during a time when the price trades at or above that limit price is called a CFD limit order to sell CFDs at a limit price.

We use limit orders to enter or exit positions. For example, in order to enter a long CFD position, you can go for placing limit order to buy a CFD if the price trades at an exact price or lower. If you want to place these orders during evening, some platforms may permit you to place limit buy orders in that time at a price that is either beyond or under the last traded price. This means, you will be able to get into the market tomorrow if the CFD trades at or below that price.

However in some other case, you can exit a long CFD position with a limit order to sell CFDs. This is also knows as “take profit” order. Let’s assume that the price is $11.25 right at the moment and you are in the market with a long CFD position. You set a limit sell order at your profit target which is $11.75. Now if the price rises to or exceeds the $11.75 mark, you’ll be exited at your profit target. However, please keep in mind that the figures used here are only for illustration. This is neither a recommendation nor a part of any particular trading system.

CFD stop order

The order under which you buy the CFDs during a time when the price trades at or above that limit price is called a CFD stop order to buy CFDs at a stop price. On the other hand, the order under which you sell the CFDs during a time when the price trades at or below that limit price is called a CFD stop order to sell CFDs at a stop price.

Like limit orders, stop orders are also used for entering or exiting a position. If the trade goes against you, stop orders are usually used as “stop loss” orders to exit you from a trade. For example, assume that you have bought CFDs at a rate of $2.50 and the stop loss order is set at $2.25. Now due to the stop loss order, if the price of the CFDs falls to or below $2.25, you will sell the CFDs and will exit the position.

However, stop orders can be used for entering a position as well. For example, let’s say the current price of a CFD is $7.50 and you placed a stop buy order at $7.80. Now you will be taken into the market if the price rises up to and above $7.80. However, please keep in mind that the figures used here are only for illustration. This is neither a recommendation nor a part of any particular trading system.

If Done Orders

“If done” order is a particular type of order that will allow you to activate an order only after another order is filled. For instance, if you place a limit order to enter a CFD in the evening with a CFD broker who allows orders to be placed after the market is closed, in that case at the same time you may also want to place your stop loss order. However, until you actually enter the position you don’t want that stop loss order to be activated. This is when you can set up a limit order to enter a CFD-the one which is already places and waiting to be filled. After that you can place a stop loss order as well. However, it will be linked with the first order as an “if done order”.

Different CFD Providers May Execute Orders Differently

You need to keep in mind that not all CFD providers execute the orders in the same way. For instance, some providers might require that before your stop loss is filled a sufficient amount of underlying stock is traded at your stop loss. On the other hand, some providers might require only that the underlying stock was traded at the price to exit the CFD. Some providers also go for weighted average in case there is insufficient amount at a particular price level.

You need to check out the websites of the brokers to get detail information about their process of handling the orders. If you don’t find enough information in the site, then you can always call them or use email or online forms to directly contact with the CFD providers.

What Happens When A CFD Goes Ex Dividend?

How do CFDs trade when stocks go ex dividend?

It is useful if you understand how stocks trade around the times when a dividend is paid. There are 3 key dates associated with dividend payments on stocks. Working backwards these are the payment date, the record date and the ex dividend date. Fortunately with CFDs there is only one date that is relevant and that is the ex dividend date.

Dividend Trading and Stocks

If you purchase the stock before it goes ex dividend you receive the dividend, but buying the stock on the ex dividend date will result in you receiving no dividend at all. The record date is 3 trading days later than the ex dividend date. You must be the registered owner of the stock on this day to receive the dividend.

On the ASX it takes three days until a purchase is recorded at the registry so there is 3 days between the ex dividend date and the record date.

The final date is the payment date on which the dividend cheque is actually posted to the investor. There can be a significant delay from the record date to the payment date.

CFDs – Its All About The Ex Dividend Date

When you are trading Contracts for Difference (CFDs) the only date of any importance is the ex dividend date as all three dates that apply to stock investors blend into one.  If you have bought the Contract for Difference (CFD) then on the ex dividend date you receive a cash payment equivalent to the amount of the dividend.  If you are short a CFD, by selling it you will have an amount equal to the dividend payment deducted from your account on the ex dividend date. These payments are deposited or withdrawn from your account automatically.

Trading With No Risk

There is a possible zero risk strategy where you could buy the CFD just 1 day before the CFD goes ex dividend and sell it after to pick up the dividend. This would appear to be risk free.  This strategy does not work because the stock usually falls by the amount of the dividend payment on the ex dividend date. This cancels out any gain you received from the dividend. And the reverse strategy of short selling a CFD before the ex dividend date to profit from the drop in value of the stock comes at the cost of the dividend being deducted from your account. There are no tax benefits available when trading Contracts for Difference (CFDs) for dividends as the franking credits are not available to CFD traders.

The Ex Dividend Date and CFDs

On the ex dividend date you would expect the stock to drop equal to the dividend payment. If you own a CFD you will get the dividend payment in cash. If you have sold a CFD and are short you will pay out the dividend amount in cash.

Source: Jeff Cartridge

CFD Finance Revealed

CFD finance is relatively simple to understand, if you understand the whole process of trading a CFD. When you buy a Contract for Difference (CFD) you are only required to provide a small margin. This margin requirement is required to cover any loss you may make on a position and changes from day to day as the value of the underlying position changes. The small margin that you pay does not cover the cost of the underlying instrument.

To hedge your position the CFD Provider will buy the underlying stock when you enter a CFD and to do this has to front up with the full purchase price. In effect the CFD Provider is lending you the cash while you hold the CFD position open.

CFD Finance when Buying CFDs

When you short sell a CFD you get paid straight away for the position you sold. You do not see the money directly in your bank account, but the CFD broker does receive the cash if they sell the underlying instrument.

So selling 1000 CFD contracts of CBA at $33 would mean that you would receive interest on $33,000. This is how CFD finance works when trading short.

Costs Of CFD Finance

Interest rates vary from provider to provider but are usually based on the following formula. A reference rate of interest plus a margin of 3% for long positions and a reference rate of interest less a margin of 3% when trading short. The reference rates used are typically the Reserve Bank of Australia (RBA) rate or the London Interbank Offered Rate (LIBOR).

The CFD provider is therefore making money on the interest margin that they take on each position. This is how CFD finance works for the provider and CFDs could be regarded as a sophisticated way to lend money.

When Is CFD Finance Charged

CFD finance is not calculated on positions that are entered and exited on the same day. Interest is only charged if a position is held overnight. So intraday positions are excluded from CFD finance.

The rate of interest is very low relative to the impact of movement in a CFD position. With current interest rates at about 6% per annum fluctuations in the CFD position can easily be more than this in a day.

High Probability Trading with CFDs

Many traders are seeking high probability trading strategies for trading CFDs. The attraction of these strategies is obvious as the more often a strategy is correct, the easier it is to trade.

It is not necessary to endure long periods of losing trades, drawdown in account balances is less and the leverage of CFDs does not have the same impact on an account.

However traders seeking high probability trading strategies may be missing the whole point of trading.

“Its Not About Being Right”

It is not just the win% that makes a trading strategy work, it is a combination of the win% and the risk reward. Looking at only one of these measures in isolation is a sure way to fail.

Assuming you had developed a strategy that was right on 95% of the trades. When it won it made an average of $100. If you were to make 100 trades you would expect to make $9,500 on the winning trades. Do not forget the losing trades however.

On the losing trades if the average loss is $2,500 then overall it will lose $12,500 from 100 trades. This strategy is not profitable even with a win% of 95%. It is important to remember that both numbers, risk reward and win%, need to be considered together.

“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.

So for a while the strategy appears to work well, until it gets hit with a number of very large losses. To reduce the size of the loss it is necessary to tighten the stop, but this typically reduces the success rate of the strategy.

Find the Balance

Back testing can be used to determine the optimal balance between risk and reward and the win%. Try testing a variety of different stop loss levels to determine the best outcome for risk reward and win%.

In my own trading I have tested a variety of chart pattern breakouts. The best trades breakout and keep going in the direction of the move. Because of this tight stops work well with chart pattern breakouts as they improve the risk reward results. Profit targets on the other hand improve the win%, but actually reduced the overall profitability.

“It Is About Making Money, Not Being Right”

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.

When assessing trading strategies it is not about being right, but about making money that is important. High probability trading strategies may or may not deliver you this result.

Using CFD Mastery to Hedge Your Share Portfolio

So what is a CFD?

Essentially, it is like a margin loan on steroids. When you take out a margin loan to buy shares, the idea is that the lender will accept your shares as collateral and loan you further funds to purchase more of the same shares, thus leveraging your capital so that you receive the benefit of the price movement and dividends from a greater number of shares than you would ordinarily be able to afford.

But while margin loans are usually around 50-65 percent for ‘blue chip’ shares, a CFD allows you to have all the benefits of share ownership along with a finance ratio up to 95 percent of the share value, depending on the market maker. You receive all the benefits and risks of share ownership without actually owning them.

Because your investment is only 5 percent and the other 95 percent (the ‘difference’) is effectively loaned to you, with interest charges, the leverage is huge. If you’re able to predict the short term movement of a share price with a high degree of accuracy, it can result in some serious cashflow.

You BUY CFDs if you think the share price will rise – and pay interest on the difference. You SELL CFDs if you think the price will fall and receive interest on the difference.

But what if you’re not interested in trading CFDs? Do they have any other uses? Absolutely! You can use them to hedge your existing share positions against price falls.

Let’s use an example to illustrate.

Say you had $100,000 that you wanted to invest in the stock market for dividend income and associated tax advantages. Let’s also say that XYZ company’s shares are currently trading at $20 per share. You would then be able to purchase 5,000 shares using your $100,000. But if the stock price dropped to $12 (think, global financial crisis) then your share portfolio is now worth only $60,000 – a loss ‘on paper’ of $40,000 of your hard-earned capital.

But if you had ’sold’ 5,000 CFDs to the market at the same time as your share purchase, at 5 percent margin, this would’ve cost you an extra $5,000. When the share price dropped from $20 down to $12 the value of those CFDs would have increased by $40,000, thus offsetting the capital loss on your shares. Because you SOLD the CFDs, you would also receive interest on the remaining $95,000 that you have effectively ‘loaned’ to the market, for the period during which you hold them. You have just used CFDs as a form of insurance against loss in value of a significant asset.

The beauty of using CFDs to hedge against capital loss, is that, unlike options or futures, they never expire. So your ‘insurance’ investment is a one-off payment for as long as you hold the shares. What’s more, you can also retrieve your initial outlay, plus or minus profit/loss, at any time. For example if, after holding the shares for a few years, the price was still only $20, you could sell the shares for the amount you paid for them and at the same time, close out your CFD position and receive your original $5,000 back. In the meantime, you’ve received tax effective dividends or bonus share issues etc, risk free.

Now, let me tempt you with a little thought. Say you used a margin loan to purchase your XYZ shares so that you can now buy 10,000 instead of 5,000 shares. Then you would sell 10,000 CFDs to the market at a cost of $5,000 to hedge your new position. So now, you receive dividends and other benefits of share ownership for twice as many shares – all risk free.

Bear in mind, that if the share price skyrockets, the capital gain you would’ve made would now be offset by the loss on the CFD value. This goes with the territory when it comes to hedging. Taking out the risk also leaves the potential rewards on the table.

How To Select A CFD Broker

There are lots of CFD brokers that you can choose from. To select a CFD broker there are a few factors that can help you to narrow down the field.

CFDs can be traded three different ways:

1. Market MakerDirect
2. Market Access (DMA)
3. ASX CFDs

When using the market maker execution model orders are placed and traded with the CFD broker. The Broker may then hedge their position by entering the same trade in the underlying market. They do not necessarily enter every trade that their client’s do.

Direct Market Access orders are not traded with the CFD provider, but instead are traded on the physical exchange. Your CFD order is filled when the order on the underlying exchange is filled.

ASX CFDs use a central order book in much the same way as stocks are traded. All orders are placed into the order book and the ASX computers execute the trades by matching together buy and sell orders.

Step 1 for Choosing a CFD Broker

Which markets you want to trade will go some way to determining which execution model you choose. Currencies, shares and indices are all traded via the market maker model. ASX CFDs also offer a limited choice of these underlying instruments as well.

To trade during the auctions at open and close you will have to use either DMA execution or ASX CFDs. The market maker model does not allow you to participate in the opening and closing auctions. When you place an order with ASX CFDs or you use the DMA model you will see your orders appear in the underlying security. If this is important to you then opt for one of these forms of execution.

Source: Jeff Cartridge

Stocks/CFDs on Total Trader

Investors are increasingly looking to Contracts for Difference

CFD Trading

(CFDs) as a more flexible method of trading stocks online.

CFD trading is carried out on live prices on Total Trader’s online
trading platforms, without the delays of normal stock trading,
such as waiting for fills from the stock exchange.

CFDs are more flexible method of trading stocks online and investors are increasingly looking to it.

Investors are increasingly looking to Contracts for Difference (CFDs) as a more flexible method of trading stocks online.

Stock/CFD Exchanges Available

Americas
US  – American Stock Exchange, NASDAQ Capital Market, NASDAQ Global Markets, New York Stock Exchange, Other OTC on NASDAQ (Pink Sheets)
Canada – Toronto Stock Exchange

Asia Pacific
Australia – Australian Stock Exchange Ltd.
Hong Kong -Hong Kong Stock Exchange
Japan - Tokyo Stock Exchange

Europe
UK – London Stock Exchange
Switzerland – Swiss Exchange, Virt-X
Germany – Frankfurt /Xetra Stock Exchange
Italy – Milano Stock Exchange
Denmark – OMX Copenhagen
Plus more than 10 other European exchanges

Index CFDs

Trade over 15 Index-tracking CFDs across over 20 exchanges worldwide with a single click. Additionally index-tracking CFDs trade on live prices without needing to subscribe to live pricing.

Index-tracking CFDs are the easiest way to gain exposure to global stock markets whether taking long or short positions. Index-tracking CFDs are linked to the performance of a stock index which allows investors to easily diversify investment risks. These index-tracking CFDs can be short sold, opening up the possibility of turning a profit in a falling market.

DMA CFD Trading – Direct Market Access

Designed to cater to the professional trader and investor, we offer CFD Exchange DMA on most global exchanges. CFD Exchange DMA gives Direct Market Access to the exchange order book on real-time CFD prices. This means a trader can combine the benefits of trading direct on an exchange with the leverage of margin-traded CFDs.

With DMA CFDs, traders get direct access to the exchange order book and can place trades directly around the live market depth. CFD Exchange DMA is a leveraged product, allowing for increased market exposure, while short selling is also a possibility.

Live Market Prices - Costs & Rebates

By default, clients have access to delayed market data on the equities and futures exchanges on which they are enabled to trade. To receive real-time market data for stock, CFD, CFD DMA or futures trading, clients will have to subscribe to the individual exchanges. Clients will incur a small monthly subscription fees for the data they elect to receive in real time. An Online Subscription Tool is available on the live trading platforms.

Data fee rebates for active equity trading clients.
For equities clients that subscribe to real-time market data, we have introduced a data fee rebate scheme where fees are rebated per exchange should clients trade the minimum number of times across both stocks and CFDs during each calendar month. Rebates are only applicable for non-professional equities clients subscribing to level-1 data. The definition of Non-Professional and Professional subscribers may vary by exchange.

Learn CFD Trading

CFDs have taken the trading world by storm. Now take advantage of this revolution and learn CFD trading yourself. CFDs offer the trader access to leverage  your returns. A deposit of just 5% will allow you to trade at leverage of up to 100 times. An investment of just $100 allows you to trade up to $5,000 of a  commodity, index or stock. I do not recommend people using the full amount of leverage.

Multiply Your Returns with Contracts for Difference (CFDs)

A small profit can be multiplied up using leverage. If you bought 1000 Microsoft at $29.00 you would normally have to spend $29,000. If you then sold Microsoft at $32.00 you would make a profit of $3,000 which is 10.3%.

If you choose to trade CFDs you can use a small deposit, just 10% of the stock value. In this case it is $2900. Exiting at $32.00 delivers a gain of $3,000, but is a dramatic improvement in terms of percentage gain to 103%.

Risk Management Is Important With CFDs

But not every trade goes as planned and it is important to learn how to manage your risk when trading CFDs. The market is a good teacher and you will learn this one way or another. When you trade CFDs you will know how important it is to understand and know the risks before you enter a new trade.

Profit When the Markets Fall with Contracts for Difference (CFDs)

Once you understand CFDs you will know how you can profit in a falling market environment. No longer do you have to sit and wait for the market to come back, as the market falls it offers opportunities on the short side as well as the long side. Contracts for Difference (CFDs) are easy to learn and far less complicated to trade than options or warrants.

Trade When You Choose with CFDs

CFDs are available for a wide variety of markets from commodities to indices and stocks . With such a wide selection of markets there is something to trade 24 hours per day. So pick a market to trade that works in with your schedule.

Source Jeff Cartridge

Contracts for Difference (CFDs) and Tax

The Australian Tax Office (ATO) was not prepared for the launch of CFD Trading in Australia and had no specific legislation addressing the taxation of CFDs. Initially any gain was treated in a similar way to gambling, but it soon became obvious that the ATO did not see CFDs the same way as gambling. Legislation was quickly drafted to address the taxation of CFDs.

Get Professional Advice

It is important that you consult your own accountant or tax adviser when it comes to tax time. Everyone’s financial situation is unique and the general guidelines here may not address all aspects of your tax situation. This is a guide to the interpretation of legislation regarding CFDs in Australia.

Income from CFD Trading

Any profit made when trading CFDs is treated as taxable income, and any losses made reduce taxable income. So the income for tax purposes is the net income calculated by adding up all your profits and taking away all your losses.

Deduct Your CFD Related Expenses

Any expenses associated with trading CFDs can be tax deductible. This includes costs like internet fees, any interest, brokerage or trading platform charges. These can be claimed to reduce your taxable income.

Capital Gains Tax and CFDs

While it would be highly unusual for a CFD trader to hold a position for 12 months or more, capital gains tax discounts do not apply to Contracts for Difference (CFDs). Franking credits also do not apply to dividends received while holding CFDs and no tax benefit is available for franking credits.

Final Word On CFDs and Tax

While it is vital for you to know your taxable situation this is not the reason to trade CFDs. It is not a wise investment decision to lose $1 to save 30 cents.

Source: Jeff Cartridge