Trading CFDs

Archive for the ‘Trading CFDs’ Category

There are a multitude of CFD companies serving the Australian market nowadays, providing varying levels of service at varying prices.

Here is some of the more well-known CFD companies in Australia.

1. IG Markets
2. Macquarie CFDs
3. Man Financial CFDs
4. E-Trade CFDs
5. CityIndex Australia
6. MF Global
7. GFT Global Markets
8. First Prudential
9. Capital CFDs Australia

Since landing on Australian shores in the year 2000, CFD trading and ultimately the quantity of CFD companies have enjoyed exponential expansion.

As such, the marketplace has come to be particularly competitive.

Due to the quantity of CFD companies in Australia, potential traders/investors should spend some time studying to determine which supplier will best meet their needs.

1. Trading Software helps you to make informed buying and selling decisions via a range of trading tools.

2. A basic requirement of good Trading Software is that of a data provider, this will help you to analyise the market before you begin to trade.

3. Once you get reliable data, use the free trial periods on offer from many software providers.

4. Good trading software should include and automatically calculate popular indicators of technical trading, for e.g. moving average, stochastic and Fibonacci series.

5. Also the design of these indicators should be re-adjustable. E.g. switching to a 9-day stochastic from a 5-day stochastic.

6. Good trading software should provide comparison between two data items, e.g. spread analysis.

7. Good trading software should be able to open several windows by dividing the screen, to allow you to use several markets at the same time.

8. The user should be allowed to keep a track on the profit or loss incurred by constantly updating closing prices in the market.

9. Good trading software could up to $1,000, but it ensures high-quality service by helping the user to develop and check indicators under different scenarios.

10. Good trading software is essential to survive today’s competitive market.

Among the questions often asked by clients when selecting an adviser or a system for CFD trading is what percentage of recommendations they can expect to be winners, and how much should they expect to make each month, year or whatever. These form part of a natural psychological comfort zone, but may be part of the reason why so many people fail as traders.

An area of speculation is whether stockmarket investment, spreadbetting, forex trading or CFDs, if the underlying system has a small edge, it is only the first part of potential success. The key to achieving constant returns lies with a correct approach to the win/loss ratio and not in expecting any particular level of gains, which can distort the underlying methodology. CFD traders have the ability to go long and short at will, and online trading makes it easy to adjust stops and targets at any time.

An example of a good win/loss ratio that fails

Consider this example: a CFD trader selects a system where there is a supposedly proven record of seven out of each ten trades proving to be winners. The idea might be that each trade has a target return of 3%, and if it is achieved the position is closed. If the trade however shows a loss of 3%, the expectation is that it should recover and the position is doubled up, with the hope of returning to parity or even making a 6% gain. Now if market or share movements were a random sequence, it would not make any difference where one entered or exited. The overall returns would over time be neither a gain nor a loss, but costs and the spread on trading would result in a virtual guaranteed loss in due course (the casino approach).

Having a slight edge is not enough

If this system had an edge though, the expectation might be that the 3% target would possibly be hit six out of ten times, thus making it a virtual winning approach. But the problem lies in the fact that although markets and shares do have short term periods when there appears to be random action, they can both trade a range and trend strongly at other times – this is what is known as regular irregularity, which might seem a paradox, but happens all the time in financial markets. Shares often move very quickly in one direction, and this trend can continue for far longer than expected, which creates two problems.

First, taking a 3% profit on a trade may appear to be very satisfactory, but it can often be seen in hindsight that the profit was taken too early, so despite achieving a winning trade there is an element of regret that more was not taken. Second, if the position is showing a loss, then the trade should in the real world be deemed to be incorrect and closed out. But in using such a system as this, by doubling up or averaging the position on losses, all that is achieved is an increase in risk – the trader might be lucky in some situations, but one or two trades out of the ten may cause severe problems. There is also the emotional capital that is tied up in losing trades.

This type of system typically might produce say six 3% winners, two evens (where one position was doubled up and returned to parity) and two 10% losers. Here the overall loss would be 2%, despite the good win/loss ratio, and this is clearly a dangerous way to play the markets, but many traders operate exactly in that way.

Improving the risk/reward

The first point is to set a stop loss on each trade and stick to it. Doubling up simply doubles the risk – that is fine if there is another system signal that reinforces the first trade, but generally that is not the case. The problem that then occurs is that if the stop and targets are quite close in percentage terms, the bouts of short term randomness mean that it can almost be like coin tossing, which with costs is a futile approach.

The key is therefore to ensure the gains are much greater than the losses, so that even if one only achieves four wins out of ten, there may be two big winners in there. If a trader decides that a 3% average loss is acceptable, then what average gain should be sought? This is the $64 question, and the key is to let profits runs as much as possible within a clearly defined trend. The following rules are part of the methodology used at Blue Index for the longs and shorts CFD portfolio, and the long term results have so far proved more than satisfactory.

Some simple rules for a consistent winning approach

1. If searching for stock trades, try to choose high volatility or beta shares – these have a higher chance of being in a trend rather than trading a range or exhibiting random action.

2. The expected initial target should always be at least twice the stop loss. If the average stop loss set is 3%, the CFD trader should look for 6%-plus gains on each trade as a starting point.

3. Try to set individual stops and limits with reference to the underlying action. If a share has moved 10% one day, it is likely to exhibit an intra-day range of much more than 3%, so the stop and target should be widened accordingly. Also support and resistance levels are very useful reference points for setting price targets.

4. If the trade hits the initial target, either close the position if support or resistance around that area is seen to be valid, or move the stop up to protect profits and let the position run.

5. If there is a sudden reversal in share price trend, close the position, whether it is winning or losing. The swings and roundabouts of trading usually mean that these unexpected trend changes even themselves out.

6. Make sure you are never exposed too much in one direction. If for instance the market falls heavily from the open, then it doesn’t matter, as even if there are more longs and shorts in your list of open positions, the huge gains on the shorts should outweigh the stops hit on the longs.

Target returns

As for target returns, many traders have unrealistic expectations. A system that can offer huge returns inherently has to have a higher risk, but bear in mind this simple fact. Warren Buffett has achieved just over 20% per annum returns on his investment fund, and he did not need to use leverage to become the world’s second wealthiest man.

Deciding which CFD broker is best, comes down to asking the best possible questions to determine your CFD trading needs. Today we are going to look at the most appropriate questions to ensure your CFD broker is right for you.

Asking the right questions comes down to making sure you are clear on your objectives when it comes to trading CFDs. To help determine your objectives here are a list of questions you may want to consider before choosing the best CFD broker.

What products/instruments are you looking to trade?

Deciding on which financial instruments you are looking to trade is vital before jumping on board with a CFD broker. Most traders starting out with Contracts for Difference begin by trading their local stock market. As a result pretty much any CFD broker will do in this instance. If however you wish to trade a range of international markets, foreign exchange, indices and sectors then your choice of CFD brokers will narrow. As a general rule the only CFD broker that allows you to trade multiple exchanges around the world are market-makers.

Direct Market Access or Market Maker?

Choosing between direct market access and a market-maker does not have to be difficult. If you wish to trade the local exchange with the highest degree of transparency, never get re-quotes, participate in opening and closing options and see your orders in the market depth, then the Direct Market Access (DMA) model is right for you.

If your priority is to access all the world’s markets through the one account including foreign exchange, indices, sectors and commodities and transparency in market depth is not your highest priority and you trade small parcel sizes then a market-maker might be the best option for you.

Do you get access to support?

When starting on any new venture getting the right support is absolutely critical. When it comes to trading Contracts for Difference, customer support from a technical point of view as well as dealing support is absolutely vital. Always ensure your CFD broker has 24 hour support and a good supply of free online training tutorials for you to gain confidence in the system.

Is the Trading Platform easy-to-use?

Modern technology plays a vital part in the online financial world and it is now common practice for a CFD broker to offer a live demo account. Ideally you want to take advantage of this free demo account to ensure you are comfortable and confident in placing trades online. Whilst you are trialling their demo it’s a good idea to make a few customer support enquiries to see how the support operates.

By asking these four simple questions you will ensure you find the best CFD broker to your trading needs.

Many people have the idea that CFDs are a very risky product. In actual fact CFDs themselves are not risky. They are just a financial product that you are able to trade and trade in any manner that you like. For example if you wanted to you could trade CFDs into a very risky fashion where you leverage your account to the maximum ensuring that you wins are huge and your losses are equally as large.

Here are 3 criteria you must understand before trading CFDs to reduce your risk.

• How to use leverage in a safe, responsible manner
• Stop overtrading
• Revenge trading

1. How to use leverage in a safe responsible manner

Leverage is one of the most misunderstood areas of CFD trading. Many people know that trading contracts for difference gives you up to 100 times leverage on your trading capital. This means if you had a $5000 account you could literally take a $5 million position. This would be referred to as ridiculous or extreme levels of leverage. There is the other end of the spectrum and that is extremely low levels of leverage and what most people don’t realise is that they control the leverage.

When you’re starting out it would be smart to keep your leverage at less than three times your account size. This means on your $5000 account you would not trade positions that total more than $15,000.

2. Stop overtrading

Over trading occurs when you were trading more than you should. This includes both the number of trades and the size that you are trading. People often over trade due to boredom or just because they feel they need to be doing ‘work’ while sitting in front of the computer.

The other reason people over trade is because of the nature of CFDs as many people believe contracts for difference are short-term trading products. This could not be further from the truth.

First and foremost you need to develop a profitable trading plan that has an edge in the market. Now that edge will lead to profits and that edge could be over any timeframe. A profitable CFD trader will have back tested their system, defined their edge and identified that their system works over their preferred timeframe and taken CFD financing into account.

Over trading is a major negative due to increased brokerage charges and in many cases the psychological damage it could do to a trader long-term.

3. Revenge Trading

Revenge trading happens after you sustain a loss and you feel quite spiteful and you wish to get your money back. As an example you may have lost $250 on a trade and as soon as you take that loss your number one priority is to get that money back, thereby revenge trading.

Revenge trading can be extremely risky and detrimental to the long term health of your trading account. Not only can it result in much larger losses than what you currently sustained but it can throw your whole week out from a mental standpoint. If you combine the leverage of CFDs and your need for revenge trading you can see how that spells disaster.

It doesn’t take long to realise that to Learn CFD Trading doesn’t require any special skill sets or a physics or maths major to excel. CFD Trading is very simple and the great news is that if you understand how to trade stocks then you’ll pick up CFD trading very quickly. Today we’ll take a look a how to Learn CFD trading the easy way.

Some CFD Basics to get you started

First of all, Contracts for Difference Trading is exactly like trading shares except you need a small amount of money up front and it’s important to know there are a couple of key differences to keep in mind.

CFD Leverage

It’s important to realise that trading Contracts for Difference involves leverage and in a nutshell that is the major CFD risk that you are faced with. If you over leverage your account you could lose more than what you have in your account. For example, if you had $10,000 cash in your CFD account you could take a $200,000 position at 5% margin. If that position gapped against you and moved 10% overnight then you’d lose $20,000 (Your $10,000 and then you’d owe another $10,000 to your CFD Broker).

CFD Finance

The other subtle difference between trading stocks versus trading shares is something referred to as CFD Finance. This essentially is the cost to ‘borrow’ the money to hold your CFD Position. In essence your CFD broker is loaning you the money and for that privilege that will charge you a small financing rate. This usually works out to be around 3% above your countries current cash rate. So in Australia the cash rate might be 3% and your CFD broker will charge you 6% per year calculated as a daily rate.

So as you can see we have covered the 2 main differences between trading stocks and Contracts for Difference to get you started and being to really understand the CFD basics.

Trading Index CFDs or Contracts for Difference can be one of the most rewarding activities a CFD trader can embark upon. Get it right here and you put yourself in an unusual position of being able to potentially control your own destiny. By that I mean you have the ability to trade a product that is highly liquid, trading around the clock nearly 24 hours a day and has the opportunity for high levels of leverage. Today we’ll discuss the top 3 Index CFD trading tips.

Get in the market and test your CFD index strategy at $1 per point
Analyse the top 50 ASX stocks daily to get a better feel for the Aussie 200
Learn how to average into your trades

Get in the market and test your CFD index strategy at $1 per point

Index CFDs give you the flexibility of trading relatively low parcel sizes. As an example, 1 SPI futures contract will control around $120,000 worth of position when trading the futures market and each tick is worth $25. That is at the smallest contract level. Whereas, many CFD brokers will allow you to trade their equivalent (often referred to as the Aussie 200) for as little as $1 per point. This gives you an advantage in that you can test your CFD trading system for much smaller amounts of risk, instead of $25 per point. Commit to a minimum of 20 completed trades at $1 per point to determine whether your CFD Index trading system is holding true to your back tested results.

Analyse the top 50 ASX stocks daily to get a better feel for the Aussie 200

Australia has an exciting market and by far the greatest turnover comes from trading the Aussie 200 index or Aussie 200 for short. Now the Aussie 200 is the bench mark for the top 200 stocks on the Australian Stock Exchange by market capitilisation and by far the greatest concentration is in the top 50 stocks. As a result I look at the top 50 stocks every single trading day to determine what the likely movement will be for that day. Once you get a feel for the market and gain confidence in a few short term indicators, you will find you can accurately identify what the likely range will be for the day.

Learn how to average into your trades

Trading at $1 per point may not sound interesting for starters but when you nail your trading strategy you can always scale up the position size. Further to this, you may find a great strategy to employ is to add to winning positions. So for those trades that you have identified are in the right direction, work out a strategy that enables you to add to those winning position by buying or selling more contracts. This will ensure that when you have a huge win, you should have the most amount of money on it and when your stop is getting hit you have the least amount of money on it.

CFDs allow people with small quantities to get much more safely started within the market by increasing their diversification.

By using CFDs, we only need to put up a fraction of our capital to obtain the same exposure on the stock than if we had bought shares through our share broker.

This capability to diversify is the overriding reason for using CFDs. We believe, in general terms (and up to a limit), the more trades you’ve exposure to, the much better that you’ll do in the long run. This really is simple because getting your money spread across as many stocks as possible (within reason) will improve your diversification within the market, and as a result decrease your risk.

With CFDs, $100 successfully has $2,000 investing power within the market. Many investors only have $2,000 to invest in the first place. You can’t get a lot diversification with $2,000 – the risks to this little amount of capital are therefore massive. Not to mention the percent that commissions and fees will consume up on this kind of a little quantity.

With CFDs, however, our little $2000 gets as a lot as $40,000 investing power in the market.

This indicates you can invest in as many as 20 trade suggestions (in theory) in CFDs. If done properly, it’s actually less risky to purchase CFDs – simply because we are able to get much better diversification.

Now, absolutely nothing in life is free of charge. To those out there that were not aware of this – we sincerely apologise for spoiling the dream.

For this fantastic diversification your CFD supplier will charge a number of fees. Some of these costs are the same as you’d spend if you had been investing in shares, but some are a wee bit different.

The costs which are generally associated with CFDs are:

Trade Commissions – generally charged as a flat rate as much as a particular trade size, and then a percentage of the trade size following that.

There are a number of CFD companies out there – you can Google them. We use IG Markets, and the costs below are based on IG. As far as we can tell they possess the lowest commissions and financing costs (explained beneath)

Minimum commission: $1 (on-line trades), $10 (phone)

Otherwise: 0.1% of total value of trade.

Example one:

We place down $100, and get exposure to $2,000 worth of stock.

Commission – $10.

Example two:

We place down $1,000 and get exposure to $20,000 worth of stock.

Commission – $20 (0.1% x $20,000)

Funding – for that benefit of only placing up a fraction of the trading capital, our CFD supplier will charge us a financing charge if we purchase, and pay us an interest rate if we are short.

Let us explain.

We place up 5% of the transaction. Our CFD provider effectively loans us the other 95% so we can have the advantage of complete ownership of the shares.

They will charge an interest rate over the loan quantity. This rate is 2.0% pa above the cash rate. The quantity is calculated every day.

So, if we put $100, and get exposure to $2,000 worth of stock, our CFD provider will charge us 7.5% x $2,000 / 365 per day. This is 41 cents per day. If you had been to hold the position for three months, financing this position would cost $37.

This is the cost of diversification.

You have to choose if 41 cents each day, every $2,000 position, is greater than the danger of only being able to keep one share in your portfolio with your $2,000.

Let’s say together with your $2,000, you enter ten trades. You are able to reap the advantages of getting 10 stocks in your portfolio for $4.10 a day.

Now, there’s an important point here that we need to bring to our your attention. Those thinking that 7.5% pa calculated daily is a big consideration, must also consider what your money ought to be making by permitting it to sit in your money management accounts – rather than in the accounts from the individual you would have otherwise bought the shares off if you had gone via Komsec.

Let’s think about it.

Buy XYZ shares with Komsec – send them a cheque for $2,000. The zero balance of one’s money management account is now earning 5.5% pa, that is, certainly, nothing.

Purchase XYZ CFDs and only use $100. The balance of your money management accounts is now $1,900 making 5.5% pa.

When you take a look at it, while you are paying 7.5% pa on $2,000 for that CFD placement, you’re nevertheless making 5.5% on the $1,900 extra you would have in your money management accounts – money you wouldn’t have experienced if you traded with Komsec.

So the cost of financing, in practice, can be far less than 7.5% pa.

We think diversification is vitally important to each and every trader. The danger of holding shares in only one company is substantial. In any case, every investor will need to assess the worth of diversification for themselves and whether CFDs are an appropriate trading tool for them.