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7 Tips To Successful Contract For Difference Trading

June 16, 2010 — 6:56 am

Step 1 – Know Your Market
Share CFDs, sector CFDs and indices all have different margin requirements, trading times and spreads. ‘Know the principles of engagement’, should be the 1st law of trading. Trading without a good understanding of the fundamentals is like trying to drive a manual car when all you’ve ever driven is an automatic. Things can stall if you become overwhelmed.

Before you begin there are three key facts you should know about the CFD you intend on trading:

Liquidity – There isn’t a point in any trader trying to buy or short sell over and above what’s deemed to be normal market size. There have been instances where new CFD traders try and ‘take -on’ a thinly traded market. This usually ends in losses.

Spread – The difference between the buying price ‘the offer’ and the selling price ‘the bid’ of any given security is a product of the prevailing law of supply and demand and not generally a function of one market maker. Any market participant should base market analysis on realistic outcomes. Often new traders assess a profitability of a potential trade on one price outcome. This is seeking the result that they want, not what is realistically obtainable.

Typical Price Action – different securities have their distinct price action. Prepare yourself by studying the typical trading activity in the day for a share or index. If your trading plan is based on the closing price only, make certain that you can ‘wear’ the intra day losses on the open positions within your account. It’s great to look at a collection of closing prices and see the ‘trend’ intact; when prior to the close the market in question was 15% against you from the previous closing price. This factor is amplified when dealing a geared product like CFDs.

Step 2 – Become proficient at using the trading platform
Fat fingers aren’t something exclusively suffered by private traders. Institutional dealers make errors of monumental proportions that dwarf anything seen in the CFD market.

In the long term, taking time learning the constraints and additional features of the trading platform can make you money by saving you money in errors. Practice makes perfect; so a suggestion is to trade a docile security in the minimum trade size, using all orders types including market orders, limits, and stoploss orders. Also be sure you are knowledgeable about the times of the day these orders can be entered, cancelled or amended and how an executed trade will appear on screen.

Step 3 – Understand the trade sequence plus your position
Every trader should have their own reconciliation process and not rely solely on the software to report your position. One suggestion is to print or write your own dealing tickets like an institutional trader. If you maintain your trading records using the same efficiency as an institutional dealer inside a bank, you’ll have an excellent advantage over the common private trader who is generally lax in the record-keeping department.

Step 4 – Maximise technology
Make sure that you don’t make the 200 versus 56 mistake – i.e. open a $200k account with a PC that features a 56k modem. Broadband has never been more affordable. Stick the dealing room number to your PC. Should you have only one phone line then, yes, you will have to log-off to call. At a minimum you will need a second phone, whether that could be a land line or a mobile. Every time a trader has lost internet connection trading opportunities are generally missed. Don’t make a technological glitch the main reason for losing money in the markets.

Step 5 – Expect stress and overcome it
Give yourself a break. Trading is stressful. Remember the market is always right, so if you are wrong, don’t take it personally. The truth is that some of your trades are going to be wrong, figure out how to take your losses. Every trader has heard this a thousand times and yes it is difficult to cut a losing trade only to see it drift back on side minutes later.

The ideal trading philosophy is always to minimise losses over time and never to operate on the ‘I hope’ school of trading. Make certain of 1 thing- survival. In the event you lose all you money by breaking your personal rules then you can not stay in the game. Staying in the game even with a reduced trading account balance beats having to walk away completely.

Step 6 – Look forward not backwards
Crying about the past is considered one of the most typical mistakes of private traders. Regretting trades that weren’t taken is as common as regret for the bad trades that were taken. Get familiar with the idea that you will be prone to making unprofitable trades and these can’t be avoided. How often have you heard expressions from traders like “I should have, I could have “.

In the financial markets it comes right down to the simple truth – ‘did’. The rest is irrelevant. Always assess why you’ve got a position in any given security on your books, write on the big white board your stoploss and take profit levels, take time out to ask repeatedly why you happen to be long X or short Y.

Step 7 – Plan your trade, trade your plan
Probably the biggest differences between a gambler and an expert trader often is the existence of a plan. A trading plan shouldn’t only be a goal list for your trading but should provide enough details to give the trader exact rules for just about any possibility that could arise. The greater detailed your plan, the less emotional involvement can enter your trading procedure, especially when a position goes against you.

There are no golden rules for making money consistently. Be wary of anyone offering a seminar claiming they might teach you a method of consistently ‘beating the market’. Most of these folks don’t trade or make money themselves. Some of them do generate profits trading but you should ask for his or her trading statements prior to hand over your cheque. This is how any bank or hedge fund hires traders; the traders have to show their log first.

Author John Masterton is a professional CFD trader trading with Australia’s most innovative CFD broker, IC Markets. Ben has published a number of articles on DMA CFDs including guides and ebooks which you can read and download for free.

Check out vital recommendations about forex investment – please read the web site. The time has come when proper information is truly within your reach, use this chance.

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Investing
Hassam
 

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Discover How To Pairs Trade Using CFDs

June 5, 2010 — 12:07 pm

Pairs trading is the action of a trader going long one Contract for difference and simultaneously selling another. As the trader is long one CFD and short the other they are not affected by broader market price movements instead they are subject to the price movements of the pair of stocks which they are trading. As long as the trader buys the outperforming security or sells the under performing security they will make money.

Most traders buy CFDs with the expectation that the market will rise, few traders take sold positions with the view the market will fall. Pairs traders do not care about market direction and do not mind which direction the market moves as long as they pick a strong pair of linked shares.

Pairs trading has become popular since the introduction of CFDs, prior to this it was hard for a trader to short sell. CFDs have made pairs trading simple and accessible to the everyday trader.

Most traders take up pairs trading strategies when there is uncertainty as to the trend of the market. The grounds for this is that it eliminates market risk, whether the trade makes money will depend on whether the trader goes long a Contract for difference that will outperform or goes short a CFD that will under perform. A common illustration of this would be buying Commonwealth Bank (CBA) and going short ANZ Bank (ANZ), because the trader expects that CBA will outperform ANZ. If both stocks rise or fall the trader is going to be indifferent, however should CBA rise and ANZ fall as the trader anticipated, the trader will make money. If CBA falls less than ANZ the trader will generate profits likewise if CBA rises more than ANZ the trader will also generate profits.

There are a number of benefits of using Contracts for difference in your pairs trading strategy. One of the main benefits is the financing offset that can be achieved when the trader earns a financing income on their sold position. Take the above example for instance, when the trader opens the long Contract for difference position on CBA they will pay a small financing charge however when the trader goes short the ANZ Contract for difference they will receive financing income. Although the offset is not 100% it will most certainly lower the expense of the trade. In many ways pairs trading as a short to medium term strategy and can be less expensive and less dangerous than simply opening a naked long or short position.

Pairs trading is not only commonly used when trading share Contracts for difference it has also become exceptionally popular for use with indices. When using Contracts for difference over indices investors can take the view that one index will outperform the other. An example of this may be the US market compared to the Australian market. In this example you would buy the ASX 200 index Contract for difference and sell the S&P 500 index CFD with the expectation that the Australian market will outperform the US market.

Pairs investors adopt a number of strategies, one of the more typical strategies used is to select pairs that are correlated, for example Stockland against Mirvac or Rio Tinto against BHP Billiton. It is also typical for traders to use sector Contracts for difference in their strategy such as the health care sector versus the materials sector or energy sector versus the ASX 200 index.

An illustration of sector trading would be the resources sector versus the ASX 200 index. The trader might be of the opinion that the resources sector is overvalued relative to the market and will under perform the market, the trader would sell the resources sector and buy the ASX 200 index. Alternatively the trader may feel that the market will give ground and money will move back into the defensive securities, in this case the trader would go long the health care sector and sell the energy sector. When choosing sectors the trader should consider their weighting within the overall index as this will help the trader decide the sectors correlation to the overall market. Pairs trading can be done on just about any financial instrument except currencies which by their very nature are allready a pairs trade.

To find out more about CFDs visit our CFD trading page and download our educational guide.

Shortcut to practical knowledge about forex trading – please go through this web page. The time has come when proper info is really within one click, use this possibility.

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Position Trading
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Discover More About Contracts For Difference

May 21, 2010 — 12:34 pm

CFD means Contract for Difference, a Contract for Difference is a type of financial instrument taken out between two parties, the buyer and the seller. The seller of a CFD has an obligation to pay the difference between the market price of a share or other instrument over which the CFD is based and the price of the CFD when it was sold to the buyer. If the difference is negative, the buyer pays the difference to the seller.

CFD trading started in London in the 1990s. It was in the year 2001 that investors realized that CFDs had significant advantages over traditional share trading, the main benefit was the avoidance of stamp duty.

Contracts for Difference have a number of advantages over traditional share trading. The main benefit is that no CFD expires and the owner of a CFD is required to maintain a small margin amount, much less than buying stocks or futures contracts outright. For an investor to ensure that they earn profits through CFD trading, it is important that they calculate risk, study market trends on a frequent basis and avoid margin calls which can occur should the Contract for Difference position move against the buyer. Investors can go short or long and use stop loss orders allowing them to minimize their losses.

There are many types of financial instruments available allowing traders to invest their money in order to profit. Depending on the level of knowledge an investor has they will choose the relevant financial product to suit their needs. If we compare all types of financial instruments, then it can be said that Contract for Difference trading is most similar to futures trading with the additional benefit of liquidity and leverage.

Below are four of the main benefits of CFDs for short term traders

1. Overnight financing
CFDs are the ideal choice for short term day traders and there are a few important reasons for this. Firstly, CFDs incur a financing rate when you hold a position overnight. The financing for long positions is usually the Reserve Bank rate or cash rate. So if the Reserve Bank rate is 4.25% then you pay 6.25% per year calculated back as a daily rate as the CFD provider will add a haircut of around 2% on top of the Reserve Bank rate. You can avoid financing charges by closing your trade before the day is over.

2. CFD Leverage
Another reason that CFD trading strategies are so popular is leverage. If you had $5,000 in a share trading account then you could only trade $5,000 and a 5% move on $5,000 would only be $250. If you took that same $5,000, invested in CFDs and opened a $20,000 position, that same 5% move now equates to $1,000. Thus with CFDs you can potentially make another $750 with no extra outlay .

3. Liquidity
The key for short term day traders is liquidity, unlike other derivative products such as options, CFDs reflect the liquidity in the underlying market . When trading using a Direct Market Access provider you can see the precise volume available on each share CFD at each price level in the market depth.

4. Low brokerage
A significant advantage of CFDs for traders are their low commission rates. Some commission products such as index CFDs are brokerage free. If you are trading the top 300 ASX CFDs , the brokerage rate is still low. Typically commission providers charge a minimum of $10 or 0.1%.

If you want to learn more about CFDs you can visit our CFD trading page and you will find a variety of related trading facts. You can learn more about Contract for Difference trading by visiting IC Markets website.

Read realistic things to know about the topic of forex investment – please study the web site. The time has come when concise info is really only one click of your mouse, use this chance.

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Day Trading
Hassam
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