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DMA CFD Day Trading Principles

April 19, 2011 — 8:01 pm

DMA CFD day traders continuously search for short term trades to benefit from small market movements on the other hand investors try to find medium to long term value. All traders and investors need a strategy even the best day traders and fund managers. Here we will examine some of the principles adopted by the best of them.

A DMA CFD trade can last anything from half an hour for short term intra day scalping or even as much as four to seven days. You must not ever let a short term CFD trade to become a long-term position if it goes against you. It’s essential to stick with your original trade parameters. If you don’t, your losses will begin to accumulate and you run the danger of wiping out your account. If you have chosen to open a DMA CFD position that you want to run for a number of days a similar rule applies. Do not let it turn out to be an investment that sits on the back burner hoping it will come good.

Be certain to only hold DMA CFD positions overnight if you’re convinced in your view, not because you can’t bring yourself to take a loss. This is certainly one of the most typical errors made by newbie traders. As the market close approaches and their positions start moving against them, many traders refuse to accept that their trades were wrong. This causes unnecessary risk taking and usually ruins the next day’s trading.

When the market starts to turn or go into consolidation phase, proficient day traders might take long and short positions a number of times throughout the trading day. This is only possible if you are flexible and are not searching for large price swings, you must also be ready to take small loses and move on to the next trade.

The essence of day trading is flexibility. You have to be ready to change with the market. You should not take it on. As soon as you have got a strong fixed view on where a given price of the CFD is heading you should put stops in place as this is where you may suffer the largest losses because when the market moves against you all you want to do is increase the size of your position.

On the somewhat longer term DMA CFD trades i.e. one to 7 day duration, you ought to be seeking at least a profit of 1% and ideally around 5% to justify your risk exposure. This doesn’t mean you should run a 5% stop loss. If at any point the trade looks wrong shut it out and look for more favorable conditions to re-enter.

Stop loss orders are extremely vital to your capital survival and your ability to keep day trading. They must be viewed as an insurance policy. Stop losses have been vastly under utilised by DMA CFD traders in the past who were always worried about being stopped only to find out their trades go the right direction later on. This will likely happen, but you need to be able to deal with the frustration and move on to the next opportunity. If you don’t, you might have adopted an incorrect trading style and will find yourself at the market’s whim.

Trading versus Investing

The difference between trading and investing is the time horizon and expectations. Investing is often a long-term game that requires committing your money to the market in search of positive capital growth and/or earnings. Investors look to place their capital into the markets for a minimum of a minimum of 10 years. Investors shouldn’t look at their CFD portfolio on a day to day basis as this will only affect their overall view of the market as the inevitable large swings would scare them.

Warren Buffett said you shouldn’t buy a stock if you’re worried it may go down in price by 50 per cent. This is an extreme view, but Buffett is without doubt one of the world’s richest men and most successful investors. 

One of the issues with long-term investing in CFDs is money management and where to place your stop losses. An intra day move could go below your perceived level of an appropriate draw down, but you have to remember that you are investing for the long term. It requires immense patience to be a long-term investor and this style only suits certain people. This why there are lots of fund managers who take care of the money of people that do not have any time or the ability to become involved in the financial markets. Long term investing should be used as part of an overall strategy.

Risk management

Risk is always present in the markets. Your trading strategy must deal with risk management. How much of your money do you want to risk at any given time?

You must always be seeking to diminish risk and this can be done through the use of stop loss orders. This is especially important if you are going to use DMA CFDs with low margin requirements where the leverage can be high. You must also be sure that your portfolio is well diversified and includes DMA CFDs from different industry sectors, this will ensure that you’re not solely subjected to the price movement of one CFD. 

DMA CFDs can be extremely rewarding if you use strict trading rules and are regimented. Before trading CFDs online you must ensure that you choose a CFD broker that is able to offer you DMA CFDs and stop loss orders, some provider only offer basic order types. 

 

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Helpful Hints On Choosing A CFD Provider

December 12, 2010 — 3:01 pm

If you made a decision to start dealing with CFDs, it means that it is time to start looking for a dependable and reputed provider for the reason that CFD trading transactions are done through a CFD provider under a deal. Making the best selection means that you will be able to protect your investment and get the greatest service.

It goes without saying that before making your concluding choice it is necessary to glance through the websites of some providers. To make you research effectual, you should check up the aspects stated below.

To start with, you need to check whether a CFD provider offers a wide range of global CFDs at attractive rates. Then make certain that there are suitable browser-based platform and large variety of trading resources provided. The point is that the best option is the absence of minimum account opening balance and the opportunity to start operations in the shortest time possible.

The following details that must be taken into account while selecting your CFD provider are credibility and handy terms. You should be seeking a provider, which is understandable and open relating to all aspects of the transaction. You should also know that it is not acceptable if a provider offers share CFDs at rates derived from the market prices and re-quotes. As a matter of fact this might be basically skewed against you. Also, it is essential for you to make sure that there are no hidden costs. Check whether you will be dealing at the market price.

It should be also stated that it is strongly recommended to prefer a CFD provider that provides the lowest commission rates, as commission must be paid no matter if you profit or lose in the deal..

Fitting trading platform is one more vital characteristic that a CFD provider should have. This platform should have such characteristics:

- Investor must be able to trade on the world’s trade markets 24 hours a day.

- Suitable trading platform needs to incorporate superior technology.

- It should provide an investor with a live back-up and support. This way, it will be much easier for investor to maximize his/ her profits.

- Trading platform must make possible for the investor to accomplish the trade fast.

- Convenient trading platform must have a customizable interface and it should offer unsophisticated access to various kinds of markets.

The last but not least thing for you to take care of is checking whether CFD provider offers a full cooperation regarding risk management techniques for CFD trading; I am talking here about stop loss orders and limited risk orders.

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WebIRESS Help And Some Solutions

November 12, 2010 — 1:32 pm

The webIRESS trading platform is among the most common web-based equity and CFD trading platforms in Australia. WebIRESS is utilized by most of the main online stockbrokers including, Comsec, Etrade, and Bell Direct, however like all on-line trading platforms some users could experience technical hiccups when first logging in. Examples of the more frequent technical issues that you may run into along with simple solutions are outlined below.

By far the most common technical issue encountered by new webIRESS traders is commonly known as the “ticking clock error” this is simply and endlessly ticking clock that appears in your browser along with the words “installing software please wait”, however, sadly for many the wait is endless. The “ticking clock error” is a common problem and with an easy resolution, this error takes place because Sun Java 1.4 or better has not been installed. The problem can often be resolved through a quick Java update, or new installation from the Sun Java internet site. In some circumstances a new version of Java may have been installed yet this error still occurs, often this is as a result of a pop up blocker or anti virus software preventing your PC from accessing “webdf.iress.com.au“ and Port 6080 or 80, this can easily be corrected by allowing your firewall or anti virus program to access “*.iress.com.au” and port 6080 or 80. As a preventive measure you should always clear your browsers cookies and temporary internet files prior to making any changes to ensure that your old settings are completely deleted.

Most webIRESS problems are associated with Java or the security settings on your computer, however on occasions problems might develop because of your internet connection or LAN firewall settings. Testing connectivity to the webIRESS server is easy and should be done if you are unable to resolve you connection troubles through the installation of Java or firewall and anti virus permission changes. A simple telnet connectivity test can be run by following the instructions below:

1. Go to “Start” > Run or open a DOS command window.
2. In the Run dialog box or at the DOS prompt, type: telnet web.iress.com.au 6080
3. Press Enter.

A Telnet window opens with the message “Connecting to web.iress.com.au…”

If the connection is successful, the Telnet message will disappear leaving a blinking block or cursor in the top left corner of the Telnet window.

If a connection cannot be established you ought to contact your ISP or system administrator as it’s likely that ports 6080 or 80 are being blocked by your firewall.

These are some of the most widespread webIRESS problems, if after trying the above solutions you’re still unable to solve your webIRESS connection problem you ought to get in touch with your CFD broker who will be able to conduct more complex webIRESS troubleshooting.

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Do I Get Franking Credits On My CFD Positions?

September 20, 2010 — 1:49 am

A common question people ask is ‘do I receive dividends when buying CFDs?’ The answer to the question is simple, ‘yes’. Though, there are a few things to be aware of as CFDs are a derivative agreement between the CFD provider and the buyer or seller of the CFD. The holder of a CFD does not own the underlying stock over which the CFD is based as such the treatment of dividends is a little different to what most CFD traders would have become familiar with when buying and selling equities.

Unlike ordinary shares, the dividends received by the holder of a long CFD position don’t have any franking credits attached to them. A franking credit is a tax credit provided by the company with the dividend, when it is paid to shareholders. In essence the company over which the CFD is based has paid a portion of tax on behalf of its shareholders. Fully franked dividends have a 30% tax credit attached. The concept of franking credits is peculiar to Australian companies.

When buying equities it is imperative to know that in order to be entitled to dividend franking credits it is obligatory to own the stocks for 47 days which includes the dividend date. The formal requirement is 45 days but this does not consist of the days the equities are purchased or sold which increases the holding period by an additional two days. Even though franking credits are not attached to CFDs most CFD traders are not concerned as most are not long term investors and do not hold their CFD positions open long enough to gain any real advantage.

CFDs traders can sell a CFD just as easily as they can buy a CFD, selling a CFD without holding a long open position is known as short selling. It is imperative to note that there is an obligation to pay a dividend to the CFD provider when a short sold CFD position is held over the ex-date. The ex-date is the date on which the seller, and not the buyer, of a stock will be entitled to the dividend.

It is important to understand that when paying the dividend on a short sold position you may also be liable to pay the franked component of the dividend. The main reason you might be liable to pay the franked component as well as the declared dividend amount is because when your CFD provider hedges your short position in the market they were required to borrow stock from an owner of the shares, it is possible that they borrowed the stock to cover your short position from another Australian resident who is also entitled to the franking credits. In most cases your CFD provider will make an effort to secure stock from overseas where the owners of the stock don’t have any use for franking credits. You should ask your CFD provider prior to short selling a CFD over dividend periods as you may find that you’re also liable to pay the franked component of the dividend.

There are a number of trading strategies CFD traders can employ over dividend periods, one of these strategies is known as dividend stripping. Dividend stripping is the purchase of stocks prior to a dividend being paid, and the sale of those stocks after that payment. Understanding dividends and ways to trade CFDs around dividend periods is important when developing your CFD trading strategy.

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Lessening Your Risks In CFD Trade

August 13, 2010 — 11:51 pm

A lot of people think that CFD trade is not secure. There is no doubt, you do not indeed have control over the market. But, DMA CFDs are such financial things that you may invest in any way you want. And this is where the risk comes in. If you have a desire to be venturesome 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 can seem like a great plan at the time, as it will imply your wins have high returns, but then so will your losses and you might very quickly wipe out your trading capital.

For instance, you can use leverage in a secure and responsible manner. Your CFD provider will enable you a great amount of leverage on your trading capital. You may also opt for too low levels of leverage. This implies, you are in control of how you use your leverage in a non-risky way. When you’re about to begin it would be smart to have your leverage low and don’t trade beyond your means. If the average leverage of a trade is 10%, then put 10% to 15% of your money into your CFD market account and trade it up to the total amount of your trading money, not beyond it. You can then offset the remainder of your capital into a high yield savings.

One more way of ceasing your risks is not over trading. Over trading occurs in case when you are trading more than you have to – beyond your capital means and risking a larger amount on each trade. Focus on the number of trades and the size you are trading. You probably have the mindset that the quicker your trade, the more you receive. Or you feel like clicking on a trade when you are single, sitting in front of your computer. In this case, you are in danger of over trading. Over trading is able to meddle with your view as a trader in the long run.

With these situations in the market, it is best to have a trading scheme. You need to have a trading scheme before you invest. You need to map out a trading plan that you can follow when you are finally trading Contracts for Difference. You can refer to mentors to assist you in mapping out your strategies in the market. Know more about discovering and working out your own trading strategy. CFD trade is not a risky business in case you learn how to minimize your risks.

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Forex CFDs And Spreads

August 2, 2010 — 1:03 am

Lots of traders and investors new to CFDs repeatedly hear the word spread mentioned by their CFD provider and ask me what it means. In brief the spread is the difference between the bid and ask price of the CFD. Spreads exist across just about all exchange traded and over the counter (OTC) products however it isn’t a term frequently utilized by share traders but more frequently mentioned when discussing index and forex CFDs.

The spread of share CFDs are often the same as the spread of the underlying security over which the CFD is derived however when trading shares this is often referred to as the bid and ask price. Many CFD providers may widen the spread of share CFDs when there is a lack of liquidity in the underlying instrument on which the CFD is derived, others may factor their commission charge into the spread. When choosing a CFD broker it’s imperative that you ensure the spreads of the share CFDs offered mirror the spread in the underlying share. Often CFD brokers that widen the spread of CFDs over liquid shares along with charging a fee are earning added revenue by taking advantage of their client’s lack of knowledge of the price of the underlying instrument over which the CFD is quoted.

Spreads are often applied to Index CFDs. The spreads applied to index CFDs work very in a different way to the spreads applied to share CFDs for the reason that some CFD brokers offer CFDs over index futures contracts even when the exchange on which they’re traded is closed. Often the price of an index CFD is based on the fair value of the futures contract or cash price, CFD providers will take the price of the index and add a spread which is often wider than the spread in the underlying index futures contract. When the exchange on which the futures contract is quoted is closed CFD brokers will often widen the spread as they’re not capable of hedging their client orders. The spreads applied to index CFDs will vary according to the exchange and liquidity of the underlying futures contract.

The spreads applied to forex CFDs work in a similar manner to the spreads applied to index CFDs however as the forex market is the largest market in the world, there’s a vast quantity of liquidity and spreads are often very tight. It is very important to be aware that some CFD providers will take advantage of forex traders by quoting tight spreads for small trade volumes or during quiet market periods, but widen the spread during busy periods or when the trader becomes more active. It’s common for CFD providers to differentiate themselves from by quoting variable or fixed spreads, however both have their advantages and disadvantages.

When trading forex CFDs with fixed spreads traders don’t have to worry about being re-quoted or spreads widening over periods of high volume, they are also able to calculate their profit or loss accurately without being at the mercy of the CFD provider. Trading forex CFDs on fixed spreads can be advantageous over variable spreads especially in periods of volatility where providers offering variable spreads will show enormously wide spreads, however trading during times of low volume will cost more. Fixed spreads are often suited to forex scalpers or day traders who trade frequently during volatility.

Trading forex on variable spreads also offers benefits for the reason that traders are often able to enter the market during quite times at better prices, however all traders should beware that variable spreads are not always advantageous in that should the trader wish to exit the trade the CFD provider may show a wider spread than the spread shown when the trade was opened. Variable spreads are suited to longer term strategy traders who don’t trade during volatile periods.

In conclusion it’s vital that as a newbie trader you understand how CFD providers can use the spread to their benefit. As always it is important to ensure that you opt for a CFD provider that is able to offer you CFDs that will fit your trading strategy as the wrong choice might be an expensive learning experience.

Before you start trading Contracts for Difference you should understand how CFD spreads can impact your CFD trading profits, it is crucial that you take this into account prior to choosing a CFD provider.

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CFDs And Tax Returns

July 14, 2010 — 2:33 pm

A Contract for Difference (CFD) is a derivative that enables you to speculate on the price movement of underlying securities including shares, indices and commodities over which the CFD is based without the need to own the instrument.

In straightforward terms a Contract for Difference is a temporary contract between the buyer of the Contract for difference and the CFD broker, with both parties taking an opposite view as to whether the value of the underlying security or instrument over which the CFD is based will increase or decrease in price. CFDs are settled in the form of a cash payment that is calculated as the difference between the opening and closing price of the underlying share or instrument. If the difference is positive the CFD broker pays the difference, and the holder of the CFD will benefit. Should the end result be negative, the holder of the CFD is obliged to pay the difference to the CFD provider, and the holder will incur a loss. As CFDs do not have an expiry date CFD positions can even be held open indefinitely.

The Australian Taxation Office (ATO) has published a Tax Ruling TR-2005/15 ‘Income tax – tax consequences of financial contracts for differences’, relating to the tax treatment of financial Contracts for Difference.

The Tax Ruling states that if you happen to be carrying on a business (or entering into commercial transactions) of buying and selling CFDs for the purpose of profit making, any gains made will be regarded as assessable income and any losses incurred are going to be an allowable deduction. The deciding factor here is whether you are in fact carrying on a business (or entering into a commercial transaction) the principle tests to determine this are outlined below:

* The quantity of transactions you enter into every year (e.g. on a weekly or monthly basis);
* The size and scale of your operations;
* Whether you happen to be carrying on your activities in a systematic, organised and professional approach for the purpose of profit making; and
* The degree of skill employed in performing these actions.

If you identify that you’re not carrying on a business (or entering into commercial dealings), any gain or loss you’d usually make would fall under the Capital Gains Tax (CGT) provisions. As CFDs are considered a CGT-asset, any capital gains are dealt with as assessable earnings and capital losses can be deducted from any current or future capital gain.

Since the ATO views Contracts for Difference as contracts of speculation, in that you’re effectively betting that the underlying security or instrument will either increase or decrease in value, it would appear from the ruling that the aforementioned many not apply to CFD transactions. If so, any capital gain or capital loss you make ‘from a financial Contract for Difference entered into for the purpose of recreation by gambling’ will likely be disregarded under the CGT gambling exemption provision.

What this all means is that if you have made a $1,000,000 capital gain from your CFD trade and you can persuade the ATO the transaction was entered into for the aim of recreation by gambling, you will be laughing all the way to the bank. However, if the outcome were a $1,000,000 capital loss, you’d lose the ability to offset the capital loss from any present or future capital gains that you have.

As the ATO views that Contracts for Difference are predominantly entered into for an income making or betting purpose, it would tricky for you to declare a capital loss if you could not prove that you are carrying on a business or entering into money-making transactions.

For more information on Contract for Difference tax rulings in Australia, you should talk to your CFD provider or ask your accountant. You will find simple tax guidance in the PDS issued by your CFD broker, you would have received this document before you start trading online CFDs.

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What Is A Trading System

July 12, 2010 — 11:47 am

Why is a trading plan important? A trading plan is the center of your business. Without a business plan most businesses will fail, exactly the same philosophy applies to trading plans.

A well defined and executed trading strategy will permit you to remain flexible whilst being disciplined.

What’s a trading plan?
A good trading strategy is a guideline to help you in making good trading decisions.

It’s made up of of two basic parts:

1. Trading system or technique for buy/sell indicators
2. Money management parameters

Developing a trading plan can be very time consuming, this is why many people tend not to bother. In far too many cases the instant gratification of trading simply overwhelms the trader.

A trading plan does not need to be complex, in reality it is often better not to be so.

An illustration of a minimal trading plan is:
“Buy 1000 share CFDs in Microsoft on open the day after my entry criteria has been met.”

You could follow this day-after-day and not have to think very hard. That is in itself a bonus. It means it is simple to follow and easy to stick to.

Professional trading plans are nearly always more complex than this. Why? Because to trade professionally you’ve got to be able to convince people to part with their capital. This is of course not always easy!

The sort of questions that a professional is going to be asked when they begin raising money to trade with will include questions like:

1. How will you trade?
2. What sort of system will you use?
3. What markets will you trade?
4. How much will you risk?
5. Just how much are you able to lose?
6. What can you realistically expect to make?
7. How much are your trading costs?
8. How will you stop yourself from losing all the money invested?
9. How much will you risk at one time?
10. How many markets will you trade?
11. What’s going to be your normal hold time?
12. How will you minimize risk?

These seem like straightforward questions, but be honest with yourself and write the answers down.

Ingredients of a trading strategy
Trading plans are usually very individual things. If one system worked for everybody then the markets would naturally cease to exist, which is why they do not. A couple of pointers to help you decide on a trading system include:

1. Forget the “secret” systems, they do not work
2. You may have dissimilar systems for a variety of markets, avoid this if possible
3. Your system doesn’t need to be mechanical, many would argue mechanical systems can not work
4. Should have the versatility for being long and short
5. It should have a money management plan to help you control risk

Perhaps the best advice is to buy something used by pros and learn to trade it. Pros know that the best systems to trade exhibit a number of simple characteristics:

1. Have a positive expectancy of winning
2. Adapt to different markets
3. Have clear entry and exit rules
4. Are not overly optimized
5. Utilize effective capital management rules

Most of these systems are inherently good to trade as there’s a clear understanding that in the long haul they make money. They do however need some effort to learn how to trade them, which tends to put off some traders.

To find out how you to build a successful trading plan for CFDs you will need to read our trading CFDs handbook. Once you have decided on a trading strategy you will need to pick a CFD provider that can help you apply your strategy.

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