How To Limit Your Loss In CFD Trade

Many people believe that CFD trading isn’t safe. Obviously, you don’t really have control over the market. However, CFDs are another financial products where you can invest in any way you prefer. And that’s where the risk comes in. If you wish to be an adventurous type in your trades, you can trade CFDs in a risky way if you don’t manage your money correctly and trade well beyond your means. It may seem like a good approach at the time, because it means your wins have high returns, but then so will your losses and also you could immediately wipe out your trading money.

Even so, you aren’t trading the markets to get rid of all of your money. Losses are unavoidable. But your goal as a trader is to gain bigger in the markets than you lose. You can lessen your risks when you concentrate on the golden rule of trading that is to”make it possible for your profits run and chop your losses short.”

For instance, you can use leverage in a safe and responsible way. CFD trade provides you with a huge leverage on your trading capital. You can even decide on incredibly low levels of leverage. Therefore, you are in control of how you use your leverage in a non-risky manner. When you are getting started it would be wise to keep your leverage at a minimum and don’t trade beyond your means. If the average leverage of a trade is 10%, then put 10% to 15% of your capital into your CFD trade account and trade it up to the whole amount of your trading capital, not beyond it. You can then offset the rest of your capital into a high yield savings account to offset the overnight financing charges of your CFD trades.

Another way of reducing your risks is not over trading. Over trading occurs when you are trading greater than you should – beyond your funds means and endangering a bigger amount on each trade. Target the amount of trades and also the size you are trading. You most likely have the attitude that the faster your trade, the more you gain. Or you feel like clicking on a trade when you’re alone, sitting in front of your computer. Then, you are in risk of over trading. This can lead to higher brokerage costs. And over trading can interfere with your mindset as a trader in the long run.

With these circumstances in the market, it is advisable to have a trading strategy. You’ll want to have a trading strategy before you decide to invest. You need to map out a trading strategy that you can stick to when you are finally trading CFDs..

Using CFDs to Hedge Your Share Portfolio

In recent years, Contracts for Difference, or CFDs for short, have become increasingly popular due to their liquidity, ease of trading and leverage.

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 5-10 percent and the other 90-95 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 10 percent margin, this would’ve cost you an extra $10,000. 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 $90,000 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 $10,000 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 $6,000 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. You would also need to arrange with you broker so that there was a link between your shares and CFD investments – otherwise you might receive margin calls.

What are the subtle differences between trading CFDs and trading stocks?

To explain CFDs it is important to know what the key differences are so you can grasp the concept easily.
The main differences are:

• CFD financing

• CFD margin; and

• CFD brokerage is lower

CFD Financing
The CFD financing simply means that for every day you hold the position overnight you are charged a small financing fee. This rate of financing is usually the overnight cash rate plus or minus 3% and on a $10,000 position will work out to be around $2.20 per night. You can consider this CFD financing a small cost to access more opportunity than what is available with traditional Stock trading.

CFD Margin
The CFD margin refers to the amount of money that you need to deposit in order to control your CFD position. For example, if you wanted to control $10,000 worth of BHP share CFDs then you would require 10% or $1000. The CFD margin means that your money is always working much harder for you.

CFD brokerage is quite low
And lastly the greatest benefit with CFD brokers is that your brokerage charge is usually quite small compared to traditional sharetrading. In Australia you might expect to pay between $20-$30 for a $10,000 stock market trade.
If you were to take the same position with CFDs you will pay no more than $10
As you can see, the concept of trading Contracts for Difference or CFDs is quite simple and I trust that this guide has allowed you to get up to speed on this exciting new financial product.

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.

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.

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

3 Essentials Rules to have CFD Trading Success

It takes just three things to trade CFDs successfully.

1. Manage your risk.

2. A profitable strategy

3. Follow the rules

Stops Are an Important Tool

Place your stop orders into the market to manage your risk. This is an essential part of CFD trading success.

If you have followed the markets as they trade you will be aware that the market can move very rapidly. A stop in the market will take you out at what you are will to risk on the trade.

With CFDs it is possible to lose more than you have in your account, because if you use to high of leverage and the market gaps down on open it is possible to have your stopped jumped and you will be closed out of the position at a loss that is bigger then you designed. so it is vitally important that you be prudent with your leverage.

A Profitable Strategy Wins Hands Down

It is vitally important that you have a profitable strategy to follow. This is an essential ingredient in successful trading. There are a wide variety of strategies available for you to trade and it is important you find one you are comfortable with.

As a start the strategy must be profitable in history. There are many programs available that allow you to test your trading ideas out to see whether they work or not. But just because a strategy works in history, does not mean it will work in real time.

Most traders do not follow a profitable strategy and as a result do not achieve the results they wish to. Following the market movement will have you buying at highs and selling at lows. Before you start trading make sure you know what your strategy is and that it works.

The discipline to stick to your strategy can take time to develop. It is not always easy to do this.

Every strategy will come into tune and go out of tune at different times. When your strategy is not in alignment with the market conditions you must be prepared to cope with this. It is important to recognise whether this under performance is temporary or permanent.

If the strategy is experiencing a losing streak that is beyond normal, it becomes time to stop trading and protect your capital.

Following your trading plan can be very difficult, just like following an exercise plan can be difficult to do.

Mastering these three tips to trade CFDs successfully can take some time, but the rewards are well worth the journey. Enjoy the trip.

Source: Jeff Cartridge

CFDs Versus Stocks And The Winner Is!

CFDs are cheap to trade and this attracts traders to CFDs when they make the comparison of CFDs versus Stocks. Using a small amount of capital to trade a much larger position is very attractive to a trader moving into CFDs after trading stocks There is nothing new to learn when it comes to the pricing of CFDs as they mirror the underlying stock prices. 

Benefits of CFDs

CFDs have a wide range of advantages over stocks as a trading instrument especially for the active trader. Brokerage costs are low, you can trade with other people’s money, because a small amount of capital controls a much larger position when trading CFDs. Leverage means a small move in the underlying stock can result in a much larger gain in the CFD position.

While CFDs may seem daunting at first trading them is actually very simple. Short selling with CFDs is one of the major strengths so now you can profit if stocks fall.

Getting Started with CFDs

So what does it take to get started, just complete an application, submit it and send it with proof of who you are. With fantastic upside there comes the potential for downside as well. Manage your risk to ensure your survival and profitability. Make sure you have sufficient capital to begin trading CFDs, $5,000 would be recommended.

Alternatives to CFDs 

Options, futures or even currency trading may be valid alternatives to trading CFDs. Options are by far the most flexible trading instrument available, but CFDs are far superior when it comes to being easy to trade. You do not have to trade $25 a point with Contracts for Difference, like you do with futures, as one contract is usually equal to $1 a point. 

CFDs have many advantages for the active trader when it comes to choosing CFDs versus Stocks.

Try Total Trader’s CFD Trading Platform.

Source: Jeff Cartridge

ASX Stock and CFD Report 26-6-09

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The SFE Futures suggested a 22 point rise in the market this morning. BHP and RIO both up in ADR form overnight, up 3.08% and 1.78%. BHP closed at the equivalent of 3475c, up 23c on last night’s close. Metals up – Copper up 1.67%, Nickel up 1.16%, Zinc up 2.21%, Aluminium up 1.54%. Oil price up 2.3% or $1.56 to $69.70 on some attacks on oil installations in Nigeria and on some interruptions to US refinery production. Gold up $5 to $939. Up 0.6%. Bonds up – 10 year yield at 3.546% down from 3.685%. A$ up to 80.33c.VIX Volatility Index down 9.26% to 26.36.

Big bounce in bonds as they get through a record week for bond issuance with good demand. A $27bn US 7 year Bond auction went much better than expected. Another record week for bond auctions next week. The auction drew a yield of 3.33% and a bid-to-cover ratio of 2.82. Housebuilder Lennar up 17% on results as the US government stimulates the bottom end of the housing market.Great night for housebuilders on the back of the Lennar results. GDP number was better than expected. GDP Q1: Actual -5.5%, consensus -5.7%, prior -5.7%. The market was expecting an unchanged number.Energy sector strong on the rise in the oil price. CRB Commodities index up 1.4%.Nike down on results and the comment that global orders are down 12% on theyear.Initial jobless claims: Actual 627K, consensus 608K, prior 612K (revised from608K)

The market is up 50. The SFE Futures suggested a 32 point rise in the market this morning. Three trading days to do your tax loss selling or make that contribution to your super fundbefore the financial year end. You also need to get your cheques in to RIO for the rightsentitlement before Wednesday night and for Graincorp by Tuesday night. Rumours of a BHP bid continue – focus on Alumina today….up 8%. Now at 149c down from a recent peakof 172c.

What is the Popularity of CFD Trading?

The popularity of CFD trading has taken everyone by storm. There would have been few people in the investment community that could have predicted the success of this leveraged product and even during the economic downturn some of the major CFD brokers are increasing trading volumes.

The popularity of CFDs in Australia has largely come down to the simplicity of the product itself. Contracts for Difference or CFDs are exactly like trading the sharemarket except you need a small amount of money upfront. While CFDs are a leveraged product, the amount of leverage a trader users is entirely up to them. This means any trader could make the product as safe or as risky as they choose.

Trading activity has recently doubled

In fact a recent article in the Australian newspaper indicated that one CFD broker managed to double the level of trading activity in the last six months of 2008 and new account openings were up 65%.

Using CFDs to Hedge and reduce portfolio volatility

One of the reasons for the heightened interest in CFD trading in Australia is due to the fact that CFDs can actually be used as a hedging tool and enable investors to reduce their risk on their existing share portfolio. Further to this any trader knows that with increased volatility comes an increased amount of opportunity.

So as you can see the popularity of trading CFDs in Australia is huge. It has overtaken the other derivative products like options, warrants and futures and will remain one of the best products to trade moving forward.