Articles of Interest

How DMA CFD Providers Make their Money

Sun, 05 Sep 2010 10:49:00 GMT

There are two types of CFD models, Market Maker and Direct Market Access. Each type has its own advantages and drawbacks and each CFD provider makes money in a very different way. It is important to understand how CFD providers make money when you trade. In this article we will focus on Direct Market Access or DMA CFD providers only.

Direct Market Access CFDs are the most transparent type of CFD available, the reason for this is simply because DMA CFD providers hedge every order they receive from their clients in the underlying market. When trading DMA CFDs you will actually see the CFD providers hedge order in the order book of the share listed on the underlying exchange on which the CFD is based.

In order to hedge in a cost efficient manner and enable the DMA CFD provider to offer CFDs on overseas exchanges the DMA CFD provider will utilise the execution services of a global investment bank that has exchange memberships globally. Having a relationship with one execution provider also allows the DMA CFD provider to achieve economies of scale resulting in lower execution and financing costs for the provider and ultimately the end client.

The global investment banks providing the DMA execution into the underlying exchange on behalf of the CFD provider also provide the financing on the positions, this execution and financing service combined works much like a CFD but on a much larger scale. The CFD provider’s hedge transactions with the investment bank are known as SWAP transactions and the service offered by the bank is known as prime broking.

A DMA CFD provider model is simple, aggregate as many client orders and positions as possible in order to achieve reduced execution and financing rates on the SWAP contracts offered by their prime broker.

CFD providers make money much like any business where the business owner buys from the wholesaler and then sells the product in stores to retail customers.

The formula is simple, if your CFD provider is charged 0.01% commission on their SWAP trade and pay a financing rate of 0.50% above or below the RBA rate any they charge you 0.10% commission on the trade and 3.00% above or below the RBA rate they will make money. In addition to making money on commission and financing DMA CFD providers also receive the benefit of netting all client positions against each other. Put simply netting means that if a long position offsets a short position the CFD provider has no position, however, as the client who is long is paying interest and the client who is short is being paid interest less a small haircut, the CFD provider profits from the difference between the two interest rates.

It is important to note that prime brokers will not deal with retail clients themselves and will typically only deal with large hedge funds and CFD providers as such CFDs are a great way of achieving access to global markets in much the same way as the global investment banks themselves and hedge funds do.

To learn more about trading DMA CFDs you can download our free CFD guide.

WebIRESS plus trading platform

Sun, 29 Aug 2010 09:23:00 GMT

The webIRESS plus trading platform is the newest product to be released by Australian financial markets software giant, IRESS market technology. WebIRESS plus allows retail online traders the ability to take full advantage of the flexibility and speed offered by IOS plus from the comfort of their home or office.

Unlike the traditional IOS classic powering conventional webIRESS, IOS plus provides users with the flexibility of being able to utilize advanced web services technology in their automated trading strategies. webIRESS plus users are now able to build trading algorithms without having to install and run the IRESS desktop application saving time and money. Being server based the web services technology also provides significant redundancy advantages.

IOS plus has significant speed advantages over predecessor with order transmission speeds being improved by a whopping 150%, this means webIRESS plus users will be able to transmit orders to the market at speeds not previously available to retail clients in Australia. Faster execution translates into more trading opportunities.

The old webIRESS has also had a makeover with webIRESS plus utilising the lasted in Java technology giving the front end interface a smooth visual appearance reminiscent of windows 7. Combined with an improved visual appearance webIRESS plus offers users advanced order types including being able to create multi legged contingent orders.

Currently webIRESS plus is only being used for CFD trading, this is primarily because of the low latency order transmission times demanded by CFD traders. It is expected that webIRESS will shortly be adapted for online share and options trading also.

At present webIRESS plus is only being offered by CFD provider International Capital Markets (IC Markets), this is primarily due to customer demand for low latency CFD trading and the company’s drive to stay at the forefront of trading technology. It is expected that other CFD providers currently offering webIRESS will soon recognise the significant benefits of webIRESS plus add this revolutionary trading platform to their arsenal.

When choosing a CFD provider you should consider the platform being offered whether it will give you an edge in your trading. If you are a day trader or scalper you should definitely consider the webIRESS plus as it will give you a significant speed advantage over all other platforms in the market allowing you to take advantage of fast moving markets and rapid match price changes in the opening and closing market phases. IRESS has once again set a new benchmark for high speed low latency trading in Australia.

To find out more about CFD trading on the webIRESS plus platform you can download our free CFD guide.

DMA CFDs: How to Get Started Trading

Sun, 15 Aug 2010 05:43:00 GMT

Learning to trade DMA CFDs is often fairly daunting initially, with new traders having to master the trading platform offered by their DMA CFD provider and of course develop a trading plan. Trading can be enjoyable and rewarding if you take some time in the beginning to do your homework, below are some essential tips to assist novice traders who are getting started.

1. Develop a trading plan
A common mistake new trader’s make is that they use an inappropriate trading strategy, or worse still, they have got no plan at all. Adopting a trading strategy and using it on a consistent basis, provides a framework of discipline. It is also likely that this is going to deliver better results than a hap-hazard approach or using a frequently changing number of approaches. Care should be taken when deciding on a strategy. It would be a mistake to attempt trading a technique dependent on five minute charts if you're unable to access your trading platform for much of the trading day. Likewise, it would be a mistake to use a strategy based on monthly charts if your trading horizon is calculated in days or weeks.

Certain traders tend to believe that a more complex system is usually a better system. They build techniques that employ huge numbers of inputs and require tremendously complex calculations and algorithms. They regularly produce graphs which are so heavily covered in indicators that it becomes difficult to spot the price action. While a few of these complicated systems certainly are effective, the greater the number of inputs and calculations they need, the more potential there is for something to go wrong. In some ways, a simple approach is usually superior (and easier to stick to with confidence) than a more complicated approach.

One of many strategies employed by a lot of traders is the short trade. This is where a trader sells a CFD that they don’t currently hold in anticipation of buying it back again at a cheaper price in the future. While it can be argued that there is no difference between taking a long position or a short position, a short position might not be suitable for a conservative trader. In theory, a short position holds much greater risk than a long position, this is because of the difference in the maximum possible downside for each type of trade. When holding a long CFD position, the worst possible move could be for the CFD to fall to zero and become worthless. For a short position, where losses will mount as prices rise, the maximum loss is limitless. While holding a short CFD position over an equity with a skyrocketing price is unlikely, it is possible. It would be a mistake for a very conservative trader to trade on the short side, especially without a stop loss order in place.

2. Learn how to use your trading platform
It can sometimes be a steep learning curve when trading on a new platform however once you have spent the time and effort and overcome any lingering fears of technology you'll realise that this is important if you are to be a successful online trader. It is no good waiting until you have open positions and the markets start moving before you determine how to put on or alter a stop-loss or take-profit order. You must ‘know’ how to manoeuvre around the platform and open, close or adjust orders without needing to look up the platform user guide.

You also need to plan for more extreme situations. Think about what might occur if your internet connection were to break down or if your PC became infected with a virus and wasn't operating at its peak. As a preventive measure, it is wise to write down your CFD provider’s telephone number near your PC. Additionally it is good practice to keep a list of your open positions so that you know what your exposure is.

3. Take accountability for your trades
Most traders closely keep an eye on their open positions but there are those that make the mistake of not doing so. By frequently checking on your open positions you'll know what your overall exposure to the market is and whether or not you're in profit or loss situation.

As well as trading mistakes, some traders simply forget that they have placed certain orders, or because they do not understand the platform they find that they have by accident placed orders without meaning to do so. It's best to discover these errors as fast as possible by keeping track of your open positions. Mistakes made when entering trades tend to be more frequent than you might think. Traders frequently hit buy instead of sell (or vice versa) or enter the incorrect quantity or even the wrong ticker symbol. These are simple errors that tend to be put down to having a “fat finger”. However, if you take your trading seriously, you need to make sure that you exercise the proper amount of care.

CFD Trading can easily be very rewarding and enjoyable if you spend some time at the start educating yourself and learning the tools of your trade. Naturally it is always important to keep in mind that trading DMA CFDs can be risky, however the tips outlined above will assist you in managing risk and will help you to avoid many of the mistakes traders make when starting out. To learn more about DMA CFDs you can download our free DMA CFD ebook.

CFD Trading: Tips for New Traders

Sat, 14 Aug 2010 11:58:00 GMT

Before you start trading Contracts for difference it is important to obtain a few tips from the professionals to make sure that you do not make many of the costly mistakes that newbie traders make. Below are three trading pointers which will help you in your CFD trading success.

1. Manage your Positions
Repeatedly new traders spend a significant amount of time selecting, planning and executing new positions, however they regularly make the mistake of exiting these trades with much less thought. This is unfortunate as it is the exit which will determine whether a trade has been profitable or not.

It is human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open in the hope that prices will move in the correct direction and reduce losses or even turn them into profitable trades.

Numerous new traders forget about the old saying “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, it is best to allow that trade to realize its full potential, as opposed to closing it out at the very first sign of a small return. On the other hand, if you happen to hold a position that is moving against you, it is best to move quickly to exit that position, before the loss becomes too great.

If you're managing your trades properly, your average winning trade should be significantly larger than your average losing trade. Once you have the discipline to buy and sell in this way, you should be able to achieve overall profitability even when only half of your trades are winners. A lot of traders make the mistake of not closing poorly performing positions fast enough. One tool that makes this less complicated is a stop-loss order.

After you have determined a price level that corresponds with the amount of risk that you are prepared to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human aspect from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.

It is important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will be activated if the price trades at or beneath the nominated stop level. Occasionally, this may lead to trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.

2. Understand the instrument that you're trading
Being over-the-counter products, there are various differences in the contract specifications of CFDs. If you are thinking of trading these products, it is critical to know what these specifications are.

You must also be aware of the influence that foreign exchange fluctuations might have on your holdings. If the base currency of the CFD rises against the base currency of your account your profits could be eroded by any currency fluctuation or your losses might be made worse.

Most CFD traders trade CFDs based on stocks listed in their home country. The simple reason for this is that traders are more comfortable trading CFDs that they're familiar with. Most traders also benefit from the convenience of trading their home market as it isn't practical to sit up for half the night to trade a Contract for difference over a share listed on an exchange in another part of the world?

In lots of cases it is much better to stick with CFDs based on equities listed on exchanges that you're familiar with as opposed to trading Contracts for difference based on stocks listed on markets you don't fully understand.

3. Use the correct order types
You should treat trading as a serious business. As such, you must take some time to make sure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been stopped up out of trades at the wrong time just because they placed the wrong kind of order.

At the very least, be certain to become familiar with the following order types:

Market order: This kind of order is utilized to execute a trade at the present market price.

Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are placed at a level that's worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be placed at a level greater than present market prices.

Limit order: A limit order is used to exit a trade. Limit orders are placed at a level that is better than the present market price. When seeking to lock-in profits on an open long position, a limit order to sell would be placed at a level greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be placed at a level underneath current market prices.

You must always understand that as Contracts for difference are leveraged and that buying and selling them can be risky. However if used correctly Contracts for difference will become a valuable tool within your trading arsenal.

To find out more about CFDs you can download our complimentary CFD trading guide.

What mistakes should you avoid when CFD trading?

Sat, 14 Aug 2010 06:48:00 GMT

Many amateur CFD traders start trading the hard way without learning from experienced traders who have made all the expensive errors traders make on their path to success. To help you understand the most common errors made by traders and to prevent you from making the same errors with your own money we've outlined a few common mistakes below.

1. Trading for the incorrect reasons
Most people will commence trading with the intention of making a return from day one. However, there are a few people who trade for entertainment. If you are serious about making a profit, it's important that you treat your trading like a business. Those who invest for entertainment will be lucky if they make money, in reality more often than not they will lose.

2. Over-Trading
You should avoid the temptation to over-trade. Over trading is really a risk for those traders that are not following a technique, choosing to sit down on the sidelines until a clear trend emerges is in itself a legitimate strategy. You should avoid the mistake of fully leveraging your positions simply because you've got free equity available. It is also important to make sure that you don't invest with money that you cannot afford to lose.

3. Psychological and Emotional Mistakes
Developing the mind-set that you need to get each trade right is often a dangerous mistake to make if you cannot accept the very fact that you're going to make errors. You may find it hard to close out of a losing position, instead your mind will find ways to persuade itself that the trade will swing around and happen to become profitable. There is a danger that subconsciously you will become blind to evidence that suggests you are wrong.

You have to recognize that you will not get each trade correct and that you don’t need to get each trade correct, this will enable you to deal with your trades effectively. Being in the wrong is something that we frequently feel bad about. We're taught through positive reinforcement that we should feel better about being correct. This repeatedly presents problems when trading.

Losing trades may cause emotional distress and prevent you from correctly analysing the market. This can present a risk that you'll start over-trading in order to make back losses or to “get even” with the market. On the flip-side, winning trades can produce feelings of excitement and invincibility. If you make the error of permitting this emotion to take hold, you may find yourself taking unnecessary risk or making stupid errors through carelessness.

You should aim to keep your trading related emotions under control. Wise traders will focus on the downside risk potential of each trade and will make sure that this is within their pre-defined parameters outlined in their trading strategy.

4. Not understanding the suitability of Contracts for difference
Trading CFDs has enhanced the trading possibilities for a great many retail traders. CFDs are an ideal product for traders with a short-term time horizon along with a desire to increase their market exposure on a small amount of capital.

It is important to remember that contracts for difference are not always suitable for long-term traders due to financing expenses which can build up over time. In addition traders who don't supervise their open positions won't find CFDs suitable. You always need to ensure that the amount of money that you allocate to your trading account is an amount that you would be able to afford to loose.

Before you start trading Contracts for difference you ought to be familiar with the negative aspects linked to the product. As with all geared financial products, the risks are going to be higher if you don’t take the time to understand the product.

For traders that understand how CFDs work and learn to minimize their risks, there can be significant benefits from CFD trading. Through the use of leverage plus the convenience of trading, retail traders now have greater opportunities than they have ever had before.

If you would like to learn more about CFD trading and how to develop a trading plan you can download and read our free guide.

Common CFD Trading Mistakes

Tue, 10 Aug 2010 09:39:00 GMT

Trading mistakes can be made by even the most experienced professionals. Most mistakes made by traders come about as a result of a lack of preparation, knowledge or discipline. Whilst it is important to learn from your mistakes, it is even better and much less expensive to learn from the mistakes of others.

Below are three of the most common mistakes made by CFD traders:

1. Excessive Leverage
One of the main benefits of CFD trading is the ability to gain exposure to a share, index or foreign exchange contract with a relatively small capital outlay. Rather than paying for the full notional value of the CFD position CFD traders can enter into positions with margins as low as 5% or even less. It is important to note that although a smaller capital outlay is required to open the position the CFD trader is still exposed to the price movement of the share CFD for the full notional value of the position. A CFD trader trading a CFD at 5% margin is leveraging their initial outlay by 20 times, meaning a $5,000 deposit could be used to open a $200,000 CFD position.

As only a fraction of the face-value of the trade is outlaid when trading CFDs a small price change could result in substantial gains but also substantial losses. For example when trading a CFD on a margin of 5%, a price rise of 1% in the underlying market may result in gains of 20%, however, if price fell by 1%, it may result in a loss of 20% of the amount required to open the position.

It is important to remember that leverage is a double-edged sword not only can it work for you but if not managed correctly it can also work against you, often novice trades ignore the fact that if unmanaged leverage can result in substantial losses.

2. Not understanding the impact of trade sizes on your account
Due to the leverage associated with CFD trading, relatively small outlays can result in large moves in your overall account balance.

For example buying 10,000 CFDs priced as $2.40 on a margin of 5% requires an outlay of only $1,200. With an outlay of only $1,200 you can hold a $24,000 CFD position. Should the price of this position move one cent it will have an impact of $100 on the profit or loss on the traders account.

If the price of the this position increased by 12 cents a profit of $1,200 would have been made, However, if the price of the position fell by the same amount a loss of $1,200 would have been made.

The overall impact of any price movement will depend on the traders overall account balance. For a trader with an account balance of $1,500, the aforementioned trade would have had a significant impact on the traders account profit and loss. Should a trader with an account balance of $40,000 open the same position the relative impact would be much less significant.

A loss of $1,200 on a $1,500 account would result in the 80% of the total account balance being lost. However, a loss of $1,200 on a $40,000 account would result in a loss of only 3% of the account balance.

3. Trading in too large parcels
It is important to calculate the exposure your trade size before placing the trade. It is common for novice CFD traders the simply trade the maximum size available to the based on their account balance without considering the amount of market exposure associated with the position.

There are a variety of methods traders can adopt in order to calculate position size. A simply strategy is to determine an acceptable amount of risk capital should the trade go against you and calculate an acceptable position size base on this.

Should you want to restrict losses on any given trade to $200 you would calculate your position size based on your stop-loss price. For example, if the CFD was priced at $1.40 and you stop-loss was at $1.15 your risk amount would be $0.25, to calculate your position size you would simply divide the loss you would be prepared to take by the risk amount. In this case this would be $200 / $0.25 = 800, therefore your position size should be 800 units.

The method outlined above is known as fixed fractional position sizing in which a certain percentage of the overall account balance is risked on each trade. Other methods include allocating a fixed dollar amount to each trade, buying or selling a fixed number of CFDs in each trade or varying the size trades according to the profitability of your account.

Using a position sizing strategy will help you avoid the mistake of placing all of your eggs in one basket.

To find out more about CFD trading you can download our free guide.

CFDs or Margin Lending - What are the Key Differences?

Sun, 01 Aug 2010 09:39:00 GMT

In the early days investors wanting to borrow money to invest had few choices, either borrow money from the bank to buy shares or call your stockbroker and apply for a margin loan.

In 2003 traders and investors in Australia were given another choice, CFDs. Since their introduction the industry has changed, CFDs being a simple form of margin lending have become the fastest growing derivative product in the country, outstripping the grow seen in the warrants market during the mid 1990’s.

No longer does a retail investor need to apply for a bank loan or deal with expensive full service brokers. CFDs have revolutionized the financial services industry, retail investors can now open a CFD account online in minutes and be up and trading before the end of the day, executing all of their orders in real-time online.

Unlike margin lending CFDs are typically traded over the internet with the trader’s portfolio being marked to market throughout the trading day, this is substantially different to the end of day portfolio revaluations used by margin lenders. Real-time portfolio margining means that traders can properly manage risk during the trading day rather than having to wait for statements to be generated at the end of the day.

Like shares bought using a margin loan CFDs offer the holder the ability to receive a dividend, however in most cases franking credits are not passed on the holder of a CFD unlike that that of a margin loan. The reason franking credits are not passed when holding a CFD is because the owner of a CFD holds an over-the-counter derivative contract and not the physical share. Not owning the physical share when holding a CFD position also means that the owner of a CFD is not entitled to voting rights in the listed company over which the CFD is based. Many CFD traders only hold their positions for a short period of time and are not interested in voting or franking credits but instead are interested in making a profit from the short term price changes of the share over which the CFD is based.

One of the most significant advantages of CFDs is that traders are able to sell them just as easily as they can buy them, what this means is that going long is just as easy as going short, allowing traders to profit in falling markets. With traditional margin lending short selling is difficult and near impossible.

CFDs are relatively cheap when compared to margin lending, typical brokers offering margin lending will charge 0.50% whereas a typical CFD provider will charge around 0.10%. One thing to be wary of is the interest rates charged by margin lenders and CFD providers. It is important to note that margin lenders will charge interest on the amount borrowed whereas CFD providers will charge interest on the full notional value of the open position, however CFD financing rates tend to be lower. Financing rates are an important cost to consider when comparing both products but this is less important for CFD traders that only hold their positions for a short period of time.

Typically CFDs offer traders more leverage than conventional margin loans allowing traders to obtain a better return on their investment. You should also be aware that an increase in leverage can also result in an increase in risk, this is common with all leveraged products. The leverage offered by CFD providers can be as much as 100 times (1% margin) whereas margin lenders will generally only offer around 10 times leverage (10% margin) or less. Leverage will vary between each CFD provider and margin lender and is often determined on a stock by stock basis considering the market capitalisation of the stock and liquidity.

As CFDs are an over-the-counter derivative product it is important to note that you do not own the underlying share or instrument over which the CFD is based, this also means that you cannot transfer your position to another CFD provider or stock broker you can only deal with the CFD provider that you opened up the position with. When you buy shares on a margin loan the shares are held in your name this means that you are able to move them freely from one stock broker to another.

CFDs suit short to medium term active traders looking to take advantage of market movements in both directions, however, margin lending is better suited to people who are looking for long-term investment opportunities and to take advantage of the tax benefits franking credits provide, in addition to voting rights. It is important to remember that both products are leveraged, as such should ensure that you adopt a proper money management plan and not utilise the leveraged offered to its full capacity.

To discover more about CFD trading and using CFDs in your trading plan, you can download our free CFD guide.

DMA CFDs or OTC CFDs - What are the benefits?

Thu, 29 Jul 2010 13:16:00 GMT

Direct Market Access CFDs or DMA CFDs are one of the most transparent types of CFDs available. DMA CFDs have the advantage of allowing participation in the underlying market of the stock over which the CFD is quoted. DMA CFDs are relatively new and have only become popular in Australia over the last few years however, continue to become popular as traders realize the transparency offered by this type of CFD.

DMA CFDs have significant advantages over the more traditional over-the-counter (OTC) variety in that they allow the trader to participate in the opening and closing phases of the market. Being able to trade in these phases of the market offer significant advantages to traders as they are can receive the opening or closing price of the day. Traditional over-the-counter CFDs do not allow the trader to participate in these phases of the market thus preventing the trader from being able to receive some of the best prices of the trading day.

Despite the drawback of not being able to participate in the opening and closing phase of the market, over-the-counter CFDs do have the advantage of allowing the trader to buy or sell volumes that may not be available in the underlying market during normal trading hours.

DMA CFDs have become popular amongst day traders and scalpers. The main reason for their popularity is because DMA CFD providers allow CFD trades to flow onto the underlying market in the stock on which the CFD is based allowing active traders to take advantage of relatively small price movements. Using DMA CFDs also allows day traders to get set at the opening price at the start of the day and clear their positions during the closing price during the closing match phase.

One of the disadvantages of DMA CFDs is that generally DMA CFD providers do not offer guaranteed stop loss orders. Guaranteed stop loss orders have the benefit of allowing the trader to manage their downside risk. Slippage often occurs when using stop-loss orders, guaranteed stop-loss orders remove this risk altogether.

It is important to be aware that prior to opening a CFD account with you should be aware that when trading DMA CFDs you will required to deposit a higher initial margin amount than the over-the-counter (OTC) variety. In addition to higher margins many DMA CFD providers will not able to offer you CFDs over indices and foreign exchange contracts due to these contracts being over-the-counter in their very nature.

There are relatively few platforms available that offer DMA CFDs, one of the most common platforms in the Australian market is webIRESS. WebIRESS offers the speed and reliability day traders and scalpers need in addition to a variety of different order types such as trailing stop-loss orders. Another popular platform is ProDeal, ProDeal offers all of the advantages webIRESS offers with the additional benefit of being able to trade over-the-counter CFDs from the same platform allowing traders to trade CFDs on indices and forex from their DMA CFD account.

It is important that before making the commitment to start trading DMA CFDs that you understand the risks associated with the product. Like all leveraged products trading CFDs can offer substantial rewards however there are also risks involved that if not managed correctly can lead to losses greater than the trader’s initial deposit.

Before choosing a DMA CFD provider you should ensure that to trail their demo platform and read their Product Disclosure Statement which outlines in detail the fees and charges, provides trading examples, and outlines the types of CFDs offered along with the risks and benefits of trading CFDs. You should ensure that the CFD provider you choose is able to offer you the platform and products that suit your trading strategy.

To find out more about DMA CFDs download our free guide.

CFD Trading and Managing the Risks

Sat, 24 Jul 2010 11:20:00 GMT

Like all financial products there are risks trading CFDs. Risk is generally linked to returns, the riskier the investment the higher the potential returns, however if risk is managed correctly it can be significantly reduced. When trading CFDs this can be done through the use of stop-loss orders and simple portfolio hedging. This article explains the key risks associated with trading CFDs and what can be done to reduce them without having an effect on the significant returns that CFDs can provide.

Before trading CFDs you must understand that CFDs are a leveraged product and that leverage can work for you as well as against you. Like all leveraged products a small price movement can result in significant returns but also significant losses. The variety of orders types available for CFD traders allow the risks associated with adverse price movements to be significantly reduced. CFD traders are able to set their orders at prices which they are prepared to close out their positions and realise a loss. Common order types used to mitigate risk are stop-loss orders, trailing stop-loss orders and guaranteed stop-loss orders.

Stop-loss orders
This is the most common order type used by traders to manage risk. A stop-loss order is simply an order to close an open position that is placed at a price below or above the current market price at a price that the CFD trader is willing to close out their open position. It is important to note that stop-loss orders can be prone to slippage should the price of the CFD gap, this is a common occurrence when trading share CFDs.

Trailing Stop-loss orders
Trailing stop-loss orders are similar to stop-loss orders with the exception that the price of the order moves in accordance with a pre-determined distance from the current trading price, this distance is set by the trader at the time of placing the order. It is important to note that the price of the order will only change if the price of the instrument moves in a favourable direction, should the price move against the trader the price of the trailing stop-loss order will not change. This order type works like a ratchet, in that it can be used to lock in profits as the position moves in favour of the CFD trader without the need for the trader to constantly change the price of their stop-loss order.

Guaranteed Stop-Loss orders
Guaranteed stop-loss orders have become common in recent times due to traders being able to guarantee their potential losses. This order type is commonly used when trading share CFDs simply because share CFDs are prone to slippage and gapping during the opening phase of the market. It is important to note that when using guaranteed stop-loss orders your CFD provider will often charge you a premium, this is like an insurance premium guaranteeing that you will be filled at the price your stop-loss order is placed.

Aside from using orders to manage your risk when trading CFDs many traders use other financial products such as shares and options to hedge their CFD positions.

Shares are commonly used to hedge CFD positions or vice versa, these are often used by traders that hold a portfolio of stocks as well as a short term CFD trading account. CFDs are often used to trade short term price movements of the stocks within their portfolio without having to sell their stocks and realise any capital gain.

Options are used by some CFD traders as a form of guaranteed stop loss. Options have an advantage over guaranteed stop-loss orders in that they are often cheaper. Hedging CFD positions using options is commonly used by more sophisticated traders that understand the core components of an options contract and how to choose the most appropriate contract to hedge their CFD position.

Aside for managing risk using order types and hedging strategies all CFD traders should ensure that they adopt strict money management techniques, meaning that they should not utilise excessive leverage or overexpose themselves to one particular CFD or sector. Utilising too much leverage is the single most common mistake made by novice CFD traders.

Before opening a real CFD account you should ensure that you practice trading on a demo account to so that you understand how to use the multiple order types available that will help you manage your risk. Remember CFD trading can be extremely rewarding if the risks are controlled.

To learn more about CFD trading you can download our free CFD trading guide.

Day Trading CFDs for a Living

Thu, 22 Jul 2010 03:43:00 GMT

Day trading contracts for difference (CFDs), stocks or indices, has become popular in recent times. The popularity of day trading has been largely due to numerous advertisements for money making systems, seminars and educational courses that guarantee overnight success. Many of these courses also profess to be low risk and require only a small capital outlay. The truth is, trading is hard work, the more time you devote developing a successful trading plan the more likely it is that you will succeed, however you should be aware that success will not come overnight or without losses.

Once you have put in the time and effort to formulate a trading strategy only then should you consider becoming a professional day trader. Day trading offers many lifestyle benefits including the ability to be your own boss, you no longer need to go into work and take orders from your boss. However, you should not take this freedom for granted, trading should be treated as a business and you must be discipline in order to succeed. If you do not apply discipline to your trading you should not consider trading as a career.

There are significant lifestyle benefits that come with day trading, being you own boss allows you to chose your working hours and even your office, you can work from home or whilst on holidays. Getting into day trading requires little capital outlay as all a Day trader needs is a trading account, computer and internet access. Before you run out and buy yourself a new computer remember that you should also have sufficient funds in your trading account, a common mistake day traders make is that they are undercapitalized when they first start. You should start with at least $20,000 - $30,000 this will allow you to develop and refine your trading strategy and allow you to recover from mistakes.

The time you spend analyzing and watching the markets will depend the trading strategy that you adopt. Day trading and scalping requires constant monitoring of the market as day traders look to profit from small price movements, whilst swing trading requires that trades be held open for 2-3 days, meaning that you do not need to spend as much time in front of the computer.

Although trading professionally from home allows you to choose your own working hours, it is very important to be aware of key times during the day, in the stock market these are the opening and closing phases of the market, in Australia this is 10am and 4pm. You should also be aware of major overseas market movements and how they affect the local market that you are trading and specific announcements relating to the company’s that you are trading.

Do not believe the promises of guaranteed returns develop and back test your own trading strategies that suit your lifestyle and the time you have to spend on your trading. Trade your strategy and refine it as required, remember you will make mistakes but don’t be disillusioned this is common, simply understand where you went wrong and refine your strategy. Once you have developed a strategy that works for you and suits your lifestyle you will be rewarded with the advantages that being a day trader has.

To learn more about trading CFDs from home for a living you should read this free CFD trading guide. There are a number of CFD providers that can assist you in getting started, but be sure to choose a CFD provider that is able to offer you a reliable trading platform.

The Benefits of DMA CFDs

Wed, 21 Jul 2010 03:17:00 GMT

Direct Market Access or DMA is the often used to describe a variety of CFDs that have become popular in the Australia market, these are affectionately known as DMA CFDs. With DMA CFDs your trade is passed directly through to the underlying share market with no dealer or market maker intervention, this means that orders are executed at the true market price and in a timely manner with no re-quotes. Trading DMA CFDs is much like trading shares online.

DMA CFDs provide complete order transparency. Traders are also able to participate in the market depth of the underlying security on which the CFD is based by joining a bid or offer queue, they are also able to participate in the open and closing auction phases of the market. DMA CFDs provide all of the benefits of trading shares with the additional leverage that CFDs offer.

Trading DMA CFDs is very similar to trading shares, traders are able to hit the bid or offer or join the buy or sell queue. DMA CFD traders have significant advantages over traders using market made CFDs in that they have the potential to enter and exit trades at superior prices.

When trading DMA CFDs you will be required to subscribe to exchange data, the cost of data varies from exchange to exchange. Once subscribed you will have access to real time prices and market depth allowing you to see the number of buyers and sellers at each different price level and participate in order queues allowing partial fills and superior execution.

One disadvantage of DMA CFDs is that guaranteed stop losses are not offered, typically DMA CFDs traders use options to manage their downside risk however these can be overly complicated for the novice trader.

When trading DMA CFDs traders have the ability to become price makers meaning that when an order is placed it is transmitted to the real market and can have an effect on the price of the stock over which the CFD is based.

Trading CFDs using a Direct Market Access (DMA) model is best suited for frequent traders that trade on an intraday basis. Frequent traders will find that DMA CFDs will enable them to trade freely without dealer intervention and obtain better prices when buying and selling. DMA CFDs are also suited to active day traders and scalpers who are looking to profit from small price changes quickly.

There are a number of CFD platforms that you can trade DMA share CFDs on, the two most common platforms in Australia are webIRESS and ProDeal. Both platforms allow traders to participate in the market depth of the DMA CFD which they are trading. The webIRESS platform is also very popular within the share trading community, mainly because of the variety of order types on offer, whereas ProDeal is very popular amongst CFD traders, this is because of the broad range of CFD on offer and its advanced charting functionality.

It is important to note that before starting to trade DMA CFDs you consider whether this type of CFD suits your trading style, choosing the wrong CFD type will have an effect on the success of your trading strategy.

You can find out more about DMA CFDs in our FREE CFD guide.

Short Selling using CFDs

Mon, 05 Jul 2010 04:42:00 GMT

Compared to short selling traditional shares, CFDs are a revolution for traders who want to make money in a falling market. Short selling with a traditional stock broker is a complicated and costly process, starting with the brokerage. Generally it is charged at full-service rates to short sell. Traders can spend around $75 a trade to enter a short position in a traditional stock. Short selling shares also attracts a higher margin rate. Generally it requires 25% of the value of the underlying position to go short compared to around 5% with a CFD provider. Short selling with a stockbroker is also dependent on the availability of stocks to borrow. If the stock is not available to short sell the position cannot be taken. If the company decides to recall the stock at any time, then the short position is closed out. Short selling a traditional share is also bound by the downtick rule. This means a trade cannot be taken in a stock unless it is the result of an up-tick in the price activity. In a rapidly falling market going short using CFDs has a big advantage, as short selling traditional shares is prohibited.

There is a famous saying, ‘markets go up by the stairs and down by the escalator’. This means a rise in prices is likely to take longer than the equivalent size of losses. However a market in a downtrend is often subject to sharp rallies also known as the dead cat bounce. A dead cat bounce in a bear market is usually followed by a resumption of the losses. The bear market rally or dead cat bounce can cause, or can be the result of short covering. This is known as a short squeeze and occurs when short traders close out their positions by buying.

All serious traders must be prepared to go short when the market signals the uptrend is over. Every market will enter a downtrend. No stock will rally always and forever, and every bull market is followed by a bear market. A general bear market will provide abundant shorting opportunities. In a bull market there are fewer shorting opportunities, therefore a trader must be more cautious about taking short positions. As a general rule the safest shorting opportunities in a bull market are on the worst performing stocks in the worst performing sector. Traders earn interest from holding a short position. This is a consideration if a trader wants to have a short position for the long term. For example, long term corrections on stocks like Telstra, AMP, Lend Lease provide traders with extra income on top of the profits as a result of the falling price.

Example – short position in Telstra Corporation (TLS)
On 24 June 2010 you believes TLS is in a downtrend and take a short position in TLS share CFDs. You decide to hold the position using a 50c trailing stop loss.

Opening the position

Telstra Corporation is quoted by your CFD provider at $3.13 bid.

You sell 10,000 Telstra share CFDs at $3.13. The total value of the trade is:
$3.13 x 10,000 = $31,300

The margin required to open the position is 10% of the total value of the trade and is calculated as follows:
$31,300 x 10% = $3130.00

Whist short you will earn interest on the trade at a rate of 3.24% per day calculated as follows:
$31,300 x 3.25% / 365 = $2.78 per day*

*This will vary according to the daily closing price of TLS

Closing the position

Telstra Corporation makes lows of $2.25 in August. A stop is then moved down 50c above this level at $2.75. The market does not go any lower before reaching the level of $2.20 on 24 August.

You now buy 10,000 TLS share CFDs at $2.20. Profit is calculated as:
($3.13 – $2.20) x 10,000 = $9,300

The position earns interest of $2.78 per day for two months:
$2.78 x 60days = $166.80 approx

Your total profit on the trade is:
$9,300 + $166.80 = $9,466.80 approx*

*should the position have moved against you, you would have incurred a loss on the trade.

You can find out more about how you can use CFDs to short sell in our FREE CFD guide.

Trading CFDs with the Professionals

Mon, 05 Jul 2010 01:41:00 GMT

The first thing to remember is that trading is not a level playing field. Professional traders have a lot of advantages over the private trader. Despite the accessibility and availability of CFDs to retail investors nowadays, in general, the pros still win more often than the non-pro traders. Why?

The pros have:
Better access and information flow – fund managers and institutional players spend significant amount of money to access market information. Most of these institutions are backed by large teams of researchers and analysts who constantly monitor the market. Professionals will almost certainly have a lot more information at their fingertips (or at the end of a telephone) than private traders. They will know a lot of people in the market and can formulate views by speaking to others.

Work as part of a team – institutional players usually have researchers, analysts and other market specialists that work as a team to maximise profitability. The typical private trader is just that – a single person. There is nothing wrong with that of course, but a private trader has to do everything from making the tea to executing the trades. Often working in a team can help professional traders – much of the work can be delegated.

Huge amounts of capital – This is of course the single biggest advantage that a professional has. Often the money is not their own and that can make trading easier on occasions. Due to the nature of their business, fund managers and other institutional traders have easy access to millions of dollars of external capital not available to retail traders.

While institutional traders and fund managers have inherent advantages over retail traders, there are ways to level the playing field. If you are to treat CFD trading as a business (as you should), you must ensure that:

You have enough capital – There’s a well-known saying among traders that goes: “Don’t trade with money you cannot afford to lose.” Sometimes this is called ‘scared money’. If you are to trade (CFDs or any other instrument), make sure that you have enough capital and that you are not trading with money you are not prepared to lose.

You get real time charts and other tools – Access to information is vital in trading. You have to know what is happening in the market particularly if there’s a lot of volatility that may provide profitable trading opportunities. You have to know the exact price movements to be able to trade the trend. End-of-day data download will be useless if you’re trying to catch intra-day price movements.

You have the fastest Internet access you can afford – Broadband access has never been more affordable, so take advantage of this technology to enhance your trading.

You pay lower/lowest commission – Commission is a business expense and must be kept to the minimum. Even large institutional traders seek ways to pay the lowest available commissions.

You have a fast computer – Prices of computers have gone down considerably and you only need to spend a few hundred dollars to have a fast computer with enough power and storage capacity. Invest in a reliable computer and do not let technology get in the way of your trading profitability.

You use a professional research service – While you could have an information overload given the amount of information readily available on the Internet and other sources, it is wise to use a reliable research or newsletter service that may provide some guidance on specific trades or markets. Use these research services as a starting point to do your own research.

You can find out more about how to trade CFDs in our FREE CFD trading guide

The Day Trader's Guide to Success

Mon, 05 Jul 2010 00:36:00 GMT

Day trading can be considered a made to order profession. To a large extent you can work when and where you want. You can dictate exactly how you want to spend your day, working from your office or home, or even when travelling.

You can live anywhere in the world and you can finally have a sense of having control over your financial affairs. You are solely in control. So what is the downside? The very fact that you have total control is sometimes a frightening prospect for many, especially those who find it difficult to create their own timetable.

Technically speaking the only difference between day trading and other forms of trading is the time frame used. Instead of taking positions for weeks or years, day traders typically hold positions throughout the day, often liquidating positions before the market close. Active day trading requires much more focus than other types of trading due to the shorter time frame and because the market moves quickly over the shorter term.

Consider the thoughts and motivations that are running through your mind and if your thoughts are a little off don’t hesitate to take a break. Day trading is hard work and it requires constant attention. You need to be motivated when you are day trading.

Discipline is by far one of the biggest attributes of successful traders. Keep a watchful eye on your bad habits. Know what they are and look to work on them as soon as possible. One way to check to see if you are trading in a disciplined way is to see if you are following your rules. There is a reason why you wrote your rules this was to ensure that you follow them to their completion.

From a day trading perspective you are best off evaluating your rules at the end of each month due to the shorter time frame of this style of trading. Keep in mind that you will break your rules occasionally and this is not a good habit to have. Find ways to overcome breaking your rules and look to rectify the problem as soon as possible.

Money management is essential if you want to become a successful day trader. In fact money management is one of the essential elements of successful trading over any time frame. Certainly if you want to be around for many years trading you are going to need to apply successful money management strategies.

There are whole books dedicated to the area of money management. You need to find a method that you are comfortable with.

Always look to enter trades that have the potential to gain twice what you are risking on the trade. This is known as your risk versus reward. If you can maintain a risk reward in excess of 1 to 2 then you are well on your way to being a profitable trader.

Never forget to use stop losses when you are placing your orders into the market. This is your insurance policy. You need to be aware of exactly where your stops are prior to even entering the trade. This is a good discipline to have and will ensure you are constantly thinking of your downside protection.

Trading should be effortless and you must remain calm. This is especially true when you are faced with a loss. Maintain your calm and react in accordance with your rules. Mentally rehearse your worse case scenarios, so if they occur you can remain calm because you are mentally prepared.

Only ever discuss your trade with a technical analyst and do not discuss open positions with other traders. They will want to give you their view of the market with no consideration of your trading methodology. Remember no one has put as much effort into your trading system and style as what you have. You know your time frames and your stops so you need to stick to them. Other traders will have a bias whereas a technical analyst can appreciate your style of trading and give their thoughts accordingly.

Maintain your independence. If you find yourself reaching for the phone or looking to send an email to someone in order to back up that your view is correct then exit the trade. It is likely this trade is not correct and you should exit.

Once you have conducted your analysis and you have done your numbers then do not doubt yourself. There is a reason why you have come up with your entry and exit signals at your key points so believe in those numbers and do not second guess yourself.

Again emphasis needs to be placed on the importance of being patient when trading. If there is nothing to trade then there is nothing to trade full stop. Do not force yourself to trade. Once you are in sync with the market you will find that trading becomes rather effortless.

If you are unsure at any stage then be prepared to walk away from the market and come back later. The market has a tendency to do this from time to time. Don’t be fooled and simply walk away.

Listen to your intuition as it usually knows something that your conscious mind may not. Your intuition is something that sharpens as you become more experienced as a trader.

Be aware of your stress levels. If you feel you’re getting stressed then get up and do some form of exercise or even get a massage. Day trading is a stressful exercise and one that requires constant attention and motivation so it’s easy to get stressed. Get some perspective about trading and life. There is more to life than just trading. Spend time with your family, friends and loved ones. Schedule time for some relaxation and sporting activities to refresh and recharge your batteries.

When you are trading it’s also necessary to be flexible with your positions. Market conditions can change rapidly so you need to be flexible with your thoughts on the market.

Stick to your chosen market and your particular time frame and do not stray from those. When you trade like this then you are in control instead of the market being in control of you. Only look to trade in high volume periods.

Never be afraid of taking profit. You cannot go broke taking profits! If you find yourself getting out of a trade at a profit and the trend continues then let the other traders fight over the last part of the move. If you continue to worry that you are missing out on profits after you exit, then simply design and test a re-entry technique that you can build some confidence around. If, as a short term trader, you find yourself making profits on a daily basis then it’s going to be very difficult to lose money long term.

When you are running a particular trade you should look to write down your reasons for entering it. This will help you later when you wish to evaluate your past trades in order to learn from them. By keeping good records and writing down precisely why you entered the trade you increase your learning curve and success dramatically. Take the extra time to do this and you will become a better trader.

You need to understand whether you are in front or behind for the day, week or month. Keep these numbers handy as you need to take responsibility for them.

We all know that hindsight is a great educator, so after you have completed a month’s worth of trades take some time to evaluate what you have done and ask yourself the question: “If I could do this trade again what would I do differently?” This will assist you in becoming a better trader and a more consistent and successful trader in the long term.

Day Trading and Investing using DMA CFDs

Sun, 04 Jul 2010 11:18:00 GMT

DMA CFD day traders constantly look for short term trades to take advantage of small market movements on the other hand investors look for 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 intraday scalping or even up to four or seven days. You must never let a short term CFD trade to turn into a long term position if it goes against you. You must stick to your original trade parameters. If you don’t, your losses will start to accumulate and you run the risk of wiping out your account. If you have chosen to open a DMA CFD position that you want to run for several days the same rule applies. Don’t let it become an investment that sits on the back burner hoping it will come good.

You should only be holding DMA CFD positions overnight if you are confident in your view, not because you can’t bring yourself to take a loss. This is one of the most common mistakes made by novice traders. As the market close approaches and their positions start moving against them, a lot of traders refuse to accept that their trades were wrong. This leads to unnecessary risk taking and generally ruins the next day’s trading.

When the market starts to turn or go into consolidation phase, good day traders can take long and short positions several times during the trading day. This is only possible if you are flexible and are not looking for big price swings, you must also be prepared to take small loses and move on to the next trade.

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

On the longer slightly longer term DMA CFD trades i.e. one to seven day duration, you must be looking for at least a profit of 1% and ideally up to 5% to justify your risk exposure. This does not mean you should run a 5% stop loss. If at any point the trade looks incorrect close it out and look for more favourable conditions to re-enter.

Stop loss orders are absolutely vital to your capital survival and your ability to keep day trading. They should 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 see their trades go the right direction later on. This will happen, but you must be able to deal with the frustration and move on to the next opportunity. If you don’t, you 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 a long term game that involves committing your money to the market looking for positive capital growth and/or income. Investors look to put their money into the markets for a minimum of at least 10 years. Investors should not 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 unnerve them.

Warren Buffett said you should not buy a stock if you are concerned it may drop in value by 50 per cent. This is an extreme view, but Buffett is one of the world’s richest men and most successful investors.

One of the problems with long term investing in CFDs is money management and where to put your stop losses. An intraday move could go below your perceived level of an acceptable drawdown, 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 many fund managers who look after the money of people who do not have the time or the ability to get involved in the financial markets. Long term investing should be used as part of an overall strategy.

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

You must always be looking to reduce risk and this can be done by using stop loss orders. This is particularly important if you are going to use DMA CFDs with low margin requirements where the leverage can be high. You should also ensure that your portfolio is well diversifies and includes DMA CFDs from different industry sectors, this will ensure that you are not solely exposed to the price movement of one CFD.

CFDs can be enormously rewarding if you adopt strict trading rules and are disciplined. Before trading CFDs on line you must ensure that you read our free CFD trading guide.

Managing your CFD trading account

Sat, 03 Jul 2010 23:57:00 GMT

The first question that novice traders generally ask is “Why bother?” Portfolio management can be a complex subject and can take a lot of time and energy. Surely it is better to simply concentrate on trading and let the money look after itself?

In an ideal world of course that would be the case. But this is not an ideal world.

Portfolio management allows you to diversify your risk. Poor portfolio management would be to have all your account leveraged in three CFD trades, all long and all in one sector. Should all CFDs drop by only a few per cent, your trading account could be wiped out. A far better method of capital allocation would be to structure your portfolio in similar way to banks. That is to “spread your risk”.

Some CFD traders would argue that portfolio management is not essential. Many CFD traders don’t even use portfolio management, and they can go on to have long and successful trading careers. However, it is prudent for most novice traders to practice sensible money management. The discipline of portfolio management will help protect you and your CFD trading account from disaster.

One disadvantage of portfolio management is that it is likely to require more capital. A $5,000 account will always find it hard to diversify and allocate capital in a diverse manner. The simple reason for this is because $5,000 is not enough to diversify.

Before you start you should always consider putting slightly more money into your CFD trading account, this will enable you to diversify your portfolio. This may sound unpalatable, but when you consider who else is looking after your capital for you (fund managers), you would be far better off managing it yourself.

Timeframes
It is hard to rely on one timeframe. Many people describe themselves as “15 minute chart” traders, others as “end of day”. In truth a mix of strategies is what will generally work best.

Some people are much longer term CFD traders, in fact they are not really traders at all but simply investors. “Buy and hold” is the maxim used by many of these people (often referred to as “buy and hope” by shorter term CFD traders).

Two of the great longer term investors in history have been WD Gann - who spoke of there being “more money in the long pull” and of course Warren Buffett - who advises anyone not to invest in a stock if they are worried about its price declining 50%.

This timeframe argument actually becomes an issue of trading style more than anything. There are trading styles as diverse as scalping and weekly swing trading that on the same CFD will produce the difference between making 200 trades a day versus 12 trades a year.

The key thing about timeframes is that your optimal timeframe is a personal thing. What works for one person may be totally wrong for the next. No single timeframe is right or wrong. Just go with what works for you.

Risk diversification
When diversifying your risk think global. Do not confine your trades purely to one market. Many of the biggest share CFDs trade large daily volumes overseas (e.g. BHP is traded in the UK as BLT - Billiton).

This is a crucial thing to be aware of. The financial markets trade almost 24 hours a day. You should use this to your advantage.

Trade while you sleep, with orders protecting your capital and taking profits. If your analysis is correct you won’t need to worry about being awake, trades will run themselves.

Make end of day decisions on these trades, you have plenty of time to analyse the picture, so use it. Do not be lazy. Do your groundwork.

Leverage
Leverage truly is a ‘double-edged sword’. Used wisely it can be the edge that gives you a huge return on limited funds. Used incorrectly and it can obliterate your trading account in minutes. Use it wisely. No good CFD provider wants you to lose. CFD providers offer leverage because they know skillful clients can benefit from it.

Always remember Rule number 1- You must stay in the game. It is unrealistic to expect to be making millions after your first few weeks CFD trading it is more likely to take 6 months to 2 years before you become a profitable CFD trader.

Remember it takes a good doctor at least 5 years to qualify and they still have patients die on them. There is no reason why learning how to trade should be a 5 minute thing. It just will not happen.

Do not over leverage - make this your mantra. Don’t use leverage just because it is there (Your car has an air bag but you don’t want to use it on every journey, right?)

Used wisely you have a huge advantage with the leverage available to you, but be aware it is like a sharp knife, best used carefully. The more skillful you become, the more you will learn how to use it and that’s what your evolution as a CFD trader will be all about.

Before you start using CFDs in your trading strategy you should decide whether CFDs are the right financial product for you. If you are a novice trader you can get additional education on using CFDs from your CFD provider.

Understanding CFD order types

Sat, 03 Jul 2010 03:20:00 GMT

There are numerous different CFD order variations, many of which are hybrid varieties of the two major order types market and limit. A market order is simply an order designed to trigger the buying or selling of a CFD at the current market price. A limit order is an order which allows you to specify the buy price or sell price of a CFD. In the case of a buy limit order the price would be below the present market price and in the case of a sell limit order the price would be higher than the current market price.

Limit Orders
Limit orders are used to enter or exit positions. As an example, as a way to enter a long CFD position, you could use a limit order to buy the CFD if the price trades at an exact price or lower. Generally limit orders can only be placed during the times specified by the exchange on which the instrument the Contract for difference is based on is listed. There are however some CFD companies which will allow you to place limit buy orders outside the hours specified by the exchanges, these CFD providers will hold your order off-market and place the order automatically when allowed to do so by the exchange. Which means you will be able to get into the market the next day if the CFD trades at or below the price of your order.

In some other cases, it is possible to exit a long CFD position with a limit order to sell. Assume that the price of the CFD is $1.25 and you're in the market to buy. You set a limit sell order at your profit target which is $1.75. If the price rises to or exceeds the $1.75 mark, your CFD position is going to be closed at your profit target.

Stop Orders
Orders which are used to buy CFDs when the price trades at or higher than a limit price are know as CFD stop orders, orders which you use to sell the CFDs during a time when the price trades at or beneath the limit price are also known stop orders. Exactly like limit orders, stop orders can be used to enter or exit a position. If a trade goes against you, stop orders are usually used called “stop loss” orders and are used to exit a position. For example, assume that you have bought CFDs at a price of $1.50 and the stop loss order is set at $1.25. If the price of the CFDs falls to or below $1.25, you will sell the CFDs and will exit the position. You can use stop orders for taking profits on trades also, lets assume that in the instance above you set your stop order at $1.75. If the price of the CFDs rise to $1.75, you will sell the CFDs and exit the position, stop orders utilised in this way are known as "take profit" orders.

Stop orders can be utilized not only for exiting positions but also for getting into new positions. To illustrate, let’s say the present price of a CFD is $1.50 and you placed a stop buy order at $1.80. Your position will be opened if the price rises up to and above $1.80. The exact same logic applies should you wish to short sell the CFD at a price below the price at which it's currently trading. Using the example above if you wished to open a short position when the price falls to $1.30 you would place your stop sell order at $1.30. Should the price fall to $1.30 your short position will be opened.

If Done Orders
"If done" orders are a specific form of order that allow traders to activate an order only after another order is filled. For example, in the event you place a limit order to enter a CFD position but don't want the stop loss order to be activated until the position is opened you would use an "if done" order. Using "if done" orders will let you set a limit order to enter a CFD at a target price and set your stop loss or take profit order to be placed before your limit order is even filled. Using "if-done" orders means that you will not need to regularly monitor your portfolio to check whether your limit order is filled.

Order Execution
Not all CFD providers execute orders in the same way. Some providers may require that before your stop loss is filled a sufficient amount of underlying stock is traded at the price of your stop loss order. On the other hand, some providers might require only that the underlying stock was traded at the price to in order for your order to be filled.

You can learn more about CFDs, and the way they work by downloading our free CFD education. Remember, before you start using some of the more complex order types mentioned above it's essential to understand how they work and whether or not they fit your trading strategy.

Things to know about online share trading

Fri, 02 Jul 2010 08:12:00 GMT

Settling (Paying for) your trades?
Prior to placing an order through your online trading account you must ensure that you have enough money in your account to cover the total cost of the transaction as soon as your buy order is placed. On the settlement day (T+3) your broker will debit the cost of the trade from your trading account. Over the settlement period funds are locked and cannot be withdrawn from your trading account for any purpose.

When do you receive the proceeds from selling your shares?
Your trading account will be credited with the proceeds from the sale on the 3rd business day after the trade.

Are there any software or data fee charges?
Some online brokers will charge a platform fee, generally platform fees are payable monthly in arrears, with the charge being deducted from your online trading account at the same time.

What Identification do you need in order to open an account?
Generally online brokers require that each person named on the account opening forms are required to provide two forms of identification when opening an account, this is usually a copy of your drivers licence and passport.

Do you need to maintain a minimum balance?
You do not have to maintain a minimum account balance, nor make an initial deposit into your trading account.

How do you transfer money into your account?
Once your account has been opened, you will receive details of your account number and also instructions as to how you are able to deposit funds. The most common methods of depositing funds are Bpay, Online bank transfer or Cheque.

How do you withdraw money from your account?
You can withdraw money from your online trading account by directly faxing a withdrawal request to your online broker.

Will you receive account statements?
As the holder of an online trading account you will receive daily, monthly and quarterly statements showing movements into and out of your account. Your statements will also show any interest earned and credited to your trading account. You can view the balance of your account along with your open positions at any time online.

Will my account balance earn interest?
Most brokers will pay you interest on the balance in your trading account at the market rate. Interest is calculated daily and generally credited to your account monthly or quarterly.

How long will it take for my trading account to be opened?
Once your broker receives your account application and identification generally your account will be opened within 24 hours.

Will you be told when your account has been opened?
Yes, your broker will send you a welcome email outlining your online trading platform log in details.

What is CHESS?
CHESS (Clearing House Electronic Subregister System) is the computerised share registry and settlement system owned and operated by the ASX. CHESS manages all of the share ownership records of ASX listed companies.

What is a HIN?
A HIN (Holder Identification Number) is the number used by CHESS to identify individual clients when they become sponsored by a particular broker. Each person is issued with a HIN when their account is opened. All of the shares you purchase will be attached to your HIN, this makes it easier to manage your share holdings and transfer them to another broker if required.

Can you have multiple HINs with a number of different brokers?
Yes, although you would not be able to sell holdings through the broker where you have an account if they are held under a HIN with a different broker.

What correspondence will you receive?
Every time you trade, you will receive a trade confirmation on the platform and from us. Each month you will also receive holding statements from CHESS, detailing any change to your holding of an individual stock during the previous month.

How do you sell your shares?
Before you can sell your share portfolio, you will need to transfer or convert your stocks to CHESS. To transfer shares from another sponsoring broker, you will need to complete a form to change your sponsoring broker. Once the transfer is complete, you will be able to view your holdings through your trading platform. You will then be able to sell your shares through your broker online. Any additional share purchases will automatically be registered with CHESS and will be available for immediate sale though your broker.

How do you transfer your holdings from another broker?
When you open an online trading account, it is possible to transfer your HIN from your new broker. This means that all holdings under your existing HIN will be transferred to your new broker (this process usually takes up to 48 hours). If there are any outstanding orders or unsettled trades with your existing broker, your HIN cannot be transferred until all outstanding orders have been settled. You will need to complete the Sponsoring Broker transfer form to transfer your HIN.

Can you transfer part of your holdings?
It is possible to transfer only some of your holdings by using the Sponsoring Broker transfer form and and listing the stocks and quantities you want transferred.

Can you sell Issuer Sponsored stock?
No, all stock must be converted to your chess holdings before you are able to sell it.

Read more about share trading in our FREE share trading guide.

Choosing the Best CFD provider

Fri, 25 Jun 2010 05:09:00 GMT

When trading CFDs it is important to choose the right CFD provider. Generally most people look for the best commission rates, reliable trading platform, and widest product range however there are many other aspects of a CFD provider which you should consider.

Firstly, you should create a checklist of the items to investigate prior to choosing your CFD provider:

1. What markets are CFDs offered on?
Some CFD providers only offer CFDs over ASX listed stocks others offer CFDs over stocks listed on many global exchanges. You need to work out what CFDs you intend to trade in your trading strategy and choose a provider that is able to offer the CFDs you plan to trade.

2. Can my CFD provider offer more than just CFDs?
Some Banks, Brokers and even CFD providers can offer CFDs but many simply ‘white label’ the offering of specialist CFD provider to offer CFDs as an additional product next to shares, futures and options. If you trade multiple products you should consider choosing a CFD provided that can service all of your needs at once, however, if you are only likely to trade CFDs, a specialized provider would better suit your needs.

3. What margins and fees do I pay?
All CFD providers have different margin requirements and fees. Generally CFD providers will charge you fees for the following:

• Holding a Position Overnight (financing)
• Exchange Data
• Transaction Fees (commission)
• Trading Platform
• Negative Account Balances

Many people look at commission charges alone without considering the financing cost that CFD providers charge when holding positions overnight. You should look at all charges holistically and take into account that most CFD providers will not pay you as much interest on your free cash as you would get from a bank.

4. What platform should I use?
Before choosing a provider you should trial a demonstration of the trading platform that they use. There are many types of trading platforms some are very simple and easy to use, whilst others are difficult and complicated. Each any every trader has their own preference and trading style some prefer platforms with advanced charting packages whilst others prefer simple and easy to use platforms. It is important to be aware that some CFD providers charge for their trading platform, in many cases these CFD providers have outsourced their technology and need to pay a third party. It is also very important to ensure that the platform that you use can offer the order types that your trading strategy requires, some platforms do not offer trailing stop-loss orders and others do not offer if-done orders. You should ensure that the platform you chose is suitable for your trading style and can offer you all of the features that you require.

5. What range of CFDs should my provider offer?
Aside from shares CFDs are offered over a variety of different instruments including foreign exchange contracts, commodities and indices. Some CFD providers do not offer CFDs on all of these instruments. You should determine whether these instruments form part of your overall trading strategy before choosing a CFD provider as this may be a determining factor.

6. What is a spread?
The spread is the difference between the bid and the ask price, typically spreads are only applied to index and foreign exchange CFDs. Crossing the spread is much the same as a paying commission, this is how CFD providers makes money from their clients trading activity. Spreads can vary from provider to provider, much like commission there is not one standard spread all providers charge.

7. What margins should I pay?
Each CFD provider offers CFDs on different margin rates, these can be as low as 1 percent or up to 100 percent. The margin you pay will vary depending on the liquidity of the underlying instrument over which the CFD is based. You should be aware that margin can work in your benefit or against you. Should you choose a CFD provider that offers low margin rates you should carefully evaluate as to whether you wish to use the full amount of leverage offered to you by you by the CFD provider. Low margins should not be the determining factor in choosing a CFD provider but rather you should consider the product range offered by the provider.

8. How long has the provider been operating for?
You should ensure that your provider is well established and can offer you the customer service that as a new trader you will require. You should call up a few providers and experience their service first hand or even visit their office to see their operations.

In Conclusion
As a new CFD trader it is important to shop around and choose a provider that will best suit your trading style, remember not all providers are created equal. Ask the right questions and chose a provider that can allow you to focus on what is really important, that is your trading!

To learn more about CFDs download our free CFD trading guide.

Understanding CFD Margin Calculations

Thu, 24 Jun 2010 00:37:00 GMT

CFD Margin requirements
An initial margin amount is required to open a CFD position, either long or short. There are two types of margins that are applied to the total value of a CFD position. These are initial margin and variation margin.

Initial Margin
Initial Margin is the initial deposit required to open a position. Generally, for Australian equity CFDs, this ranges from between 5% to 50% of the total notional value of the trade. Hence, if you purchased 10,000 XYZ CFDs at $1.35, you would be required to have at least $1,350 in your account to cover the minimum margin requirement (10% of your total position size of $13,500). The margin requirement for index and foreign exchange CFDs can be as low as 1%.

Variation Margin
Variation Margin is the difference between the initial margin and the margin required to keep the position open as the position value changes. For example if you buy 2,000 XYZ CFDs, at $5.60 it would give you a position value of 2,000 x $5.60 = $11,200. Assuming XYZ is margined at 10% you would need at least $1,120 initial margin to open this position. If XYZ goes down to say, $5.40, you would now have a loss of $400 ($0.20 x 2,000). This loss (known as variation margin) is subtracted from the initial margin of $1,120, leaving a deposit of $720. Since you still hold 2,000 XYZ contracts at $5.40 you have a margin requirement of $1,080 (i.e. 2000 x 5.40 x 10%). There is now a paper loss of $400 and the initial margin has been reduced to $720. This is $360 less than the margin required to keep the position open, which means more margin is needed to top up the account. The shortfall in margin is known as a shortage in equity. If you cannot maintain your margin requirement you will not be able to extend your position however you will always be able to reduce or close a position.

Equity Balances
The equity (or balance) of your account will fluctuate according to the money you have deposited or withdrawn from your account, the profits or losses in your account and the size of the positions held. During the trading day your account balance, including all open positions, are valued against the prevailing market rate. Therefore your equity balance is constantly calculated in-line or marked-to-market with market movements. Your end of day account balance is calculated using the mid-closing rates (or the last traded price). The equity balance is used to assess your available margin against current positions, and potential new positions you may wish to take. Your cash balance is used to establish if there is a requirement for additional margin deposits on your account. Once a CFD trade is opened, variation margin requirement must always be maintained for your open positions. It is your responsibility to ensure that your account is sufficiently margined at all times, especially during volatile trading periods. You will only be allowed to trade and maintain open positions on the basis of cleared funds in your account, not on promised funds or funds in transit therefore you must allow sufficient time for funds to clear when depositing money into your account.

If a position goes into profit, the increase in the equity of your account allows for more positions to be opened.

Shortage in Equity
A shortage in equity occurs when the account balance falls below the required initial margin. Accounts with a shortage in equity are generally only allowed to reduce open positions, until the equity balance is in excess of the required deposit. No new positions can be opened until this situation is rectified.

Margin Calls
If the market moves against you and your equity balance falls below your initial margin you generally have the option to:

i. close one or more of your open position(s), to reduce your initial margin to the required level; and/or

ii. add more money to your account to maintain the initial margin.

This is the first trigger level for margin, referred to as the 'Margin Call', which you must add additional funds to maintain your open positions.

Stop Out Level
You are at risk that your open positions will generally be closed when you have less than 40% of your required initial margin (i.e. 4% of your position size) however this may vary between CFD providers.

Margin, leverage and risk
Margin and the associated leverage can be very useful if you use it correctly. It can also be devastating to the inexperienced trader who has little understanding of the dangers of using leverage without a defined risk management strategy. There are several ways of using the leverage available by trading CFDs, from the most conservative to the most aggressive. The way in which you use leverage will depend upon your personal circumstances.

Before trading CFDs you should read the Product Disclosure Statement (PDS) that your CFD provider issues as this will explain in detail how your CFD provider deals with margin. You should also read the our guide on CFD trading, which explains leverage and margin in detail.

A Basic Guide to CFD trading

Tue, 22 Jun 2010 03:52:00 GMT

What is a CFD?
Contracts for difference are a popular derivative in the Australian market place. When you own a contract for difference, you own a contract over the difference between the price that you purchased the contract for and the current price of the contract, ie you own a contract over the performance of the share. That is, if you buy a CFD at $1.43 and the price rises to $1.55, then your contract is for the difference between the purchase price of $1.43 and the current price of $1.55, which is 12 cents in profit. If the CFD had decreased in value, then you would be obliged to pay the difference between the purchase price and the current price. Rather than buying the shares, you buy a contract over the movement in the share price and this is revalued or “marked to market” in real time.

A CFD offers you all the benefits of trading shares without having to physically own them. It is a contract that mirrors the performance of a share or index, is traded on margin, and like physical shares your profit or loss is determined by the difference between the prices you buy and sell at. CFDs also incorporate any adjustments for corporate actions, such as dividends and stock splits.

What are the benefits of CFDs?
CFD’s are traded on margin, which is a more efficient use of your capital because you only have to allocate a small proportion of the value of your position to secure a trade, whilst still maintaining full exposure to the market. In effect you are able to magnify the returns on your investment. The commission charged by CFD providers is low, usually around $10 or 0.1%, this means that you don’t have to pay high priced brokerage on either long or short transactions.

Because you are trading the price movement of a share or index without physically owning it, it is as easy to sell a share or index CFD, as it is to buy it. Therefore a CFD trader has the opportunity to profit from both bull and bear markets as well as short-term intra-day movements.

Just as CFDs mirror the price movement of the physical share market, they also mirror any corporate actions that take place in the underlying share or index (dividends, stock splits or consolidations). This means that the owner of a share CFD will receive dividends, and participate in stock splits, just as they would if they owned the physical share. It also means that if a share goes ex-dividend (meaning a dividend is due to be paid) while you are short a stock, then you are obliged to pay the dividend in the same way as if you were short the physical stock. When owning a CFD you are not entitled to any voting rights because you do not actually own the underlying shares.

Short Selling
Short selling using CFDs is the same as selling CFDs that you already own. Generally there are no restrictions on how you transact the CFDs or on the number of short sellable CFDs. You can short sell any available CFD however some CFD providers may have a restricted short sell list or restrictions on the amount of a stock that can be short sold. With CFDs you don’t have any short selling restrictions like the uptick rule with shares. This provides significant advantages over the traditional techniques of short selling.

Instruments on which CFDs are offered
Most CFD providers offer CFDs over the major sectors, major share indices and stocks in the major share indices of the major markets. Many CFD providers offer thousands of different instruments in Australia, Asia, the UK, Europe and America.

Costs associated with CFD trading
There is a small commission cost to open a CFD position, the price of a CFD is the same as that of the underlying stock or index on the stock market. This means that purchasing a CFD is the same as purchasing the underlying stock except for the low cost of brokerage, which makes CFD trading ideal for people with low account balances.

CFD positions carried overnight incur financing costs for the total value of the position. Traders who are long Australian CFDs will pay interest and those who are short will receive interest on their positions. The interest rate payable is based on the cash rate for the country in which the stock is listed. If the base interest rate of a country is less than the financing cost charged by the CFD provider for going short no interest will be charged on short positions. An example of this is in Japan where interest rates are close to 0%. In this case no interest is chargeable on short CFD positions.

If you hold a CFD overnight, you are charged interest on the total value of the position, this is because the CFD provider hedges your position by financing the purchase of the underlying stock in the market. They then pass on the interest to you the client at a premium. The interest rate charged depends on the market that is being traded. If you are short a CFD you will receive interest on the full value of your position for every day that you hold your position overnight. If you have a well-balanced trading system where you are short and long for around the same amount of time, you will effectively only pay only a small interest charge for overnight positions.

You can find our more about CFD trading in our FREE CFD trading guide.

Trading CFDs on the webIRESS trading platform

Sun, 20 Jun 2010 11:08:00 GMT

webIRESS is a financial information and trading platfrom that provides users with dynamic, real-time market data and trading functionality for CFDs, forex and equities. webIRESS combines the advanced features of its big brother the IRESS information solution with the added benefit of trading, advanced order types and multi product portfolio management.

Who uses webIRESS?
webIRESS is very popular amongst professional traders and investors and small broking firms who:
•   want a reliable low maintenance trading platform
•   want accurate and timely market data and news
•   want real time high speed execution
•   want advanced charting and order types

What features does webIRESS offer?
webIRESS is based on the same technological backbone as the IRESS platform the only difference being rather than being a downloadable application webIRESS is java based and can be accessed using an Internet browser. webIRESS can be accessed through the login portal on your brokers website. Most brokers also offer a webIRESS demo for prospective clients, this allows them to trial the platform and test it’s functionality.

The main features of the webIRESS platform are:
•   Browser based CFD and equity information
•   Direct market access (DMA) and complete order management capabilities
•   Advanced order types including stop loss and trailing stop orders
•   Comprehensive news and market data, including detailed security information
•   Sophisticated market monitoring tools including a market map
•   Comprehensive market analysis and charting
•   News and trade sensitive alerts
•   Excel plug-in for data extraction

The quote and watchlist functionality within webIRESS displays real-time dynamic quotes for CFDs, stocks and indices. Users can create and maintain their own custom watchlists or use existing watchlists built into the webIRESS trading platform. Real time market prices can be monitored using the quote ticker, which displays live trade prices for securities in a watchlist or for all the securities on an exchange.

What exchanges can I trade Direct Market Access (DMA) CFDs on?
webIRESS allows you to trade Direct Market Access (DMA) CFDs on 17 different equity exchanges. You can trade on real time data using the advanced order types available in webIRESS in addition to the orders types supported by the 17 exchanges on which direct market access (DMA) CFDs are offered.

The exchanges which you can trade Direct Market Access (DMA) CFDs on are:
•   ASX: Australian Stock Exchange
•   NZSX: New Zealand Stock Exchange
•   LSE: London Stock Exchange
•   SES: Singapore Stock Exchange
•   KLSE: Malaysian Stock Exchange
•   TSE: Tokyo Stock Exchange
•   HKSE: Hong Kong Stock Exchange
•   TWSE: Taiwan Stock Exchange
•   KSE: Korean Stock Exchange
•   OSE: Osaka Stock Exchange
•   OJ: Osaka Hercules
•   NYSE: New York Stock Exchange
•   NASDAQ: Nasdaq
•   DAX: Deutshe Borse
•   SIX: Swiss Exchange
•   Borsa Italiana
•   Euronext Paris

webIRESS provides you with market depth, a list of all current bids and offers and the last 20 trades for the current day for all of the exchanges listed above. Course of sales data is available for the last 60 days and the current day.

What market news is available on the webIRESS trading platform?
News is offered from a wide range of news vendors who provide detailed company information in addition to global market wraps and economic announcements.

News from the following vendors is available to you directly within the webIRESS trading platform:
•   ASX Signal G Company News: company announcements made to the ASX transcribed into text format
•   Reuters News
•   AAP News: domestic financial, economic and other news
•   Dow Jones Australia/New Zealand news
•   Dow Jones International news
•   Ralph Wragg

What Security and Market Information can webIRESS provide?
Security details such as company financial data, dividend and capital adjustment histories and business profiles are provided on the webIRESS platform to ensure all webIRESS users have the most recent and up to date information to aid in their decision making.

The Market Activity and Market Map functions within webIRESS provide users with a the ability to obtain a quick market and sector overview with the touch of a button. The Market Activity lists all of the top movers in the total market and the major market segments. The Market Map is a visual representation of the market performance of the securities in an industry group, for the current day.

Indices and economic indicators available within the webIRESS trading platform include:
•   major international interest rates
•   major international indices
•   foreign exchange rates
•   commodities prices

Using webIRESS to trade CFDs
CFD trading on webIRESS can be easily enabled by your broker if they have an IRESS order routing system (IOS) that that is configured to allow direct market access (DMA) CFD trading.

Charts on webIRESS
webIRESS includes a range of chart indicators and trend lines for simple analysis of price charts. webIRESS can provide access to over 20 years of historical pricing data allowing users to perform detailed back testing.

Can I customize my webIRESS layout?
Traders can configure the webIRESS workspace layout to suit their own preferences. They can also create custom keys for frequently repeated tasks and save all personal settings for future use.

WebIRESS Excel Interface
The webIRESS excel interface enables the creation of live price links between webIRESS and Excel, or the direct extraction of historical data into an Excel spreadsheet.

How do I get started trading CFDs on webIRESS?
There are many brokers that offer the webIRESS trading platform however before getting started on the webIRESS platform you should download a webIRESS demo and read our guide to CFD trading.

CFD Trading Strategies

Fri, 18 Jun 2010 09:21:00 GMT

There are many diverse CFD trading strategies and styles and it is up to you the CFD trader to decide which style suits your personality and the time you have available in your day for CFD trading.

Intra Day
If you are looking to be an active CFD trader you would generally use an intra-day trading style. This is where you look to take advantage of the swings in the market during the opening and closing phases. You need to have a good CFD trading system that can react to quick moves during market swings.

One example of a good intra-day trading style could be the following. At the close of the Australian market, the FTSE and other European markets are about to open. You have the advantage of having longer time to study the support/resistance levels and the possible reactions to the previous night’s trading in the US and any moves that have occurred in the Far East markets. You should be looking to trade this market in the first two hours when there is high liquidity and close out your CFD position unless you wish to carry it overnight. But only do so if your system agrees, not because you do not want to close out a losing trade.

You can trade the last one to two hours of the US market during early Australian time. The US markets provide good liquidity and the opportunity to take overnight positions.

For first time CFD day-traders, this is a good way to gain exposure to new markets. The US and European markets offer good risk/reward returns in highly liquid CFDs over shares and indices.

End of Day
End-of-day trades are executed at or near the close when it becomes clear where the price is going to ‘settle’ or close. This enables you to study the price action relative to previous day’s movements and then decide how the price is going to move in the near future based on the price action and indicators you are using in your CFD trading system. You then create a set of orders: an entry level, a stop level and a potential exit level. You can then either put these orders into the market via your online trading platform or by phoning your broker.

This style of CFD trading frees you up to do other things. It should not need your constant checking of the market to see if things are going in your direction. It is tempting to keep checking how your trade is progressing, which could be a drawback as it could ‘spook’ you out of a CFD trade because you are watching it too closely and you get unnerved.

The idea is to do your research and be confident in your trade. You know you might lose, but your stop is there to protect any damage to your capital. Let the market do the work and let it determine if the CFD trade is a correct one.

Trend Trading
Trend trading is when you are attempting to define the trend and only enter into CFD trades in the direction of the trend, the line of least resistance. The “trend is your friend” is one of the truest sayings in the markets. Following the trend is different from being ‘bullish or bearish’ where you have a fixed view of where the market should go and in which direction. Following the trend means you have to have a good system to detect and follow the trend.

You have to be flexible because the trend can obviously change and you have to be aware of a potential reversal in the market.

There are a lot of trend following funds in the market that trade many different products including CFDs, equities, treasuries, currencies and commodities. You will need to exercise your patience as ‘riding the trend’ is easier said than done. You need to have confidence in your CFD trading system. You will also have to accept losses and getting ‘chopped’ occasionally in your CFD trading. Remember that no system works all the time, and patience is needed.

You need to be alert for signs that the trend is ending or about to change. You will also need to be aware that the last part of the trend can accelerate as traders with the wrong CFD positions look to exit their losses at the point of maximum pain.

You must decide what timeframe you are going to follow the trend on and stick to it. It will be of no use if you keep flicking between charts hunting for the trend or once your CFD trade is on to look for confirmation that the trade is correct by finding a chart that agrees with your position.

It is a good idea to scale in and out of your CFD positions as this gives a greater degree of control and will probably give you more confidence in the trade as you will not be fixed at one price.

Swing Trading
The term ‘swing trading’ refers to playing both sides of the markets moves - long and short - by taking advantage of the market’s oscillations during your chosen timeframe as the price ‘swings’ from overbought to oversold on your system.

The duration of your CFD trades can and will vary. You must check the price action and support and resistance levels as it is most likely the market will oscillate between these levels as it tries to find the next directional move. Intra-day CFD trades will last from half an hour in fast markets to two or three hours depending on the characteristics of your market.

If you are taking overnight positions then you could find these ‘swings’ can last from two to three days and more.

It is a relatively simple way to trade CFDs and offers good risk/reward as long as you stick to your numbers and follow your strategy through without breaking your rules. It will allow you to play long and short trades, but you must be flexible and realise when it is not working and again exit quickly because it is likely a new move or trend is starting.

News Trading
If you intend to trade CFDs on news announcements you must understand that this is a very specialised and tricky game.

Remember that news travels very fast these days via internet and TV. You need to assess the news very quickly to judge how to trade the CFD around it. Is the news already fully factored into the price or only partially or is it fresh news that the market was not expecting? These are some of the decisions you will need to face.

Try not to jump into the action straight away unless you have a pre-determined strategy on a given bit of news.

Try to gauge the market’s reaction to the news as this is far more important than the news itself. Most CFD traders will tell you this is how they like to react to news, but we cannot all act the same way.

News can also give you an exit to a current trade. Take the exit as a good trade and look for your next trade, don’t be greedy and think it is the start of a bigger move.

If you have seen some news hit the screen and you have taken a CFD position in the market on the back of it, watch out for a sudden reversal if the expected move does not arise. It is most likely you are in company with the rest of the market with your view, and when this happens try and be among the first to exit, not the last as these moves can be fast and expensive as you wonder why the market is going against the news.

Be aware of how markets operate, they need energy to move and this energy comes from information flow. The news you are expecting or reading had to originate from somewhere and be aware that frequently the news would already be in the price as the markets and traders try to pre-guess the announcement and the markets reaction to it. “Better to travel, than to arrive” is another market motto, meaning it is better to be on the price action before an announcement than to wait for the announcement.

Zone Trading
Zone trading requires good research to define zones of important support and resistance. It is in these areas that you are looking to enter your CFD trades. You will also need to know where your exit point is if the CFD trade is incorrect. Once you are confident in your ability and system to find these zones you can trade bigger positions at these levels as you are playing ‘pure’ price action and not relying on indicators.

This style can be used on all time frames and with total money management. It requires patience and discipline about other systems for the market to reach your chosen levels to trade. It has the advantage over ‘indicator’ trading in that it does not require you to be ‘attached’ to a screen as you have pre-determined levels to trade at.

It is essential that you have stops in place as you are adopting a ‘view’ in your market that the price of the CFD should react away from your level once reached and this can leave you without flexibility.

Expert Tips
You must have a ‘high probability’ system to make profits. You must also have a good idea and grasp of money management as this will save you when you have some losing CFD trades. You can either buy a system that has been designed and is used by professional CFD traders, but check it is real and not one being offered by ‘snake-oil’ salesmen. It is an easy arena to prey on people and do not believe all the ‘$500 into $5000 on one trade’ systems on the internet.

Another important factor to consider when you are choosing a CFD trading system: does it have back up and follow up tuition? It takes time to learn all the nuances of any system and if you can ask questions this will be a very big plus.

An alternative is to try and design one yourself. The advantage of this is it will be fully suitable to your needs and you will understand its workings.

The disadvantage of this is that you may spend far too long developing something. Forget looking for the ‘Holy Grail’. It can be fun to look for it, but again it is distracting and why would anyone be selling something that was in effect a guaranteed money making machine. It can also be costly as you purchase various systems in the hunt for the Grail. It would be much better to understand that is does not and cannot exist.

The best option is to buy a CFD trading system that suits you and your chosen strategy for trading, i.e. day trading or end of day positions.

Learn the CFD trading system by constantly putting it to the test and understand its strengths and more importantly its weaknesses. Make sure it does suit you and the time it allows you to study the prices.

To learn more about CFD trading styles you can download our CFD book for free.

Can a trust invest in CFDs?

Fri, 18 Jun 2010 04:18:00 GMT

A common question that many people ask is 'can my trust fund invest in CFDs?'. A typical misconception amongst traders and investors is that trust accounts are treated in a different way by their CFD provider to individual and corporate accounts. Actually trust accounts are treated in the exact same way as any other account, the only difference is the tax treatment of gains when the trustee chooses to distribute them to the beneficiaries of the trust.

Traders and investors commonly use trusts for investing in CFDs for the following reasons:

for members of their family or 'family group' to benefit from their CFD trading profits;
tax benefits, providing the trust passes the family control test and makes distributions of trust earnings only to beneficiaries of the trust who are members of the 'family group';
protecting the assets of the family group's from the liabilities of one or more of the members of the family (for instance, in the event of a family member's bankruptcy or insolvency);
offer a mechanism to pass family assets on to future generations;
accessing favorable taxation treatment through the use of income tax "tax-free thresholds" of members of the family; and
avoiding issues including challenges to the will following the event of the death of a member of the family.

The Benefits of using a trust to invest in CFDs
The major benefit of a family trust is that the trustee is able to disperse income earned from investments made by the trust in any way they see fit, providing the distributions are made to the beneficiaries of the trust. Trustees do not have to make trust distributions in any particular percentage or in the same proportion.

A trust is not required to pay income tax on profits that are distributed to the beneficiaries, but does need to pay tax on undistributed earnings. Trustees can distribute trust income to several beneficiaries, and in proportions that take advantage of those beneficiaries' personal tax rates. The beneficiaries then pay the tax on distributions made to them.

For example, should an adult beneficiary of the trust only receive income from the trust and benefit from the tax-free threshold (currently $6,000) for that year, the trustee would be able to distribute a part of the family trust's revenue to this person. The result would be that the beneficiary will receive some income but may not need to pay tax if that amount is less than $6,000. If the distribution to the beneficiary exceeds their tax-free threshold, the surplus amount is going to be taxed at the beneficiary's personal tax rate.

Distributions received from a trust are not considered a special type of income, but instead form part of a beneficiary's assessable income. If the beneficiary receives income from other sources along with distributions through the trust, all of their income is taxed together.

If the beneficiary's earnings exceed the tax-free threshold for a particular year, the rate of tax applied to the total amount of the surplus earnings over the tax-free threshold may be lower than that for other beneficiaries due to total income that these other beneficiaries already receive.

Undistributed income is taxed in the hands of the trustee at the top marginal tax rate giving a strong incentive for family trusts to completely allocate the trust's income before the end of every financial year.

The trustee should also take care in relation to which beneficiaries are chosen to receive distributions, as penalty tax rates can apply to distributions made to minors.

Income Distributions
One important aspect of a family trust that has got to be kept in mind is to whom the distributions are made.

First, all distributions have to be made only to individuals who are eligible under the terms of the trust deed to be beneficiaries of the trust.

Secondly, for trusts that have made a family trust election, the distributions may only be made to beneficiaries who are within 'the family group'. In relation to this the ATO states on its website:

"A consequence of making a family trust election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy."

In other words, if a family trust makes a family trust election after which it pays out to someone not a member of the family group, they are taxed at the maximum rate possible.

Trust Buzz Words
Trust deed - This set out the terms and conditions under which a family trust is established and maintained. The trust is established by the trust's settlor and trustee (or trustees) signing the trust deed, and the settlor giving the trust property (the "settled sum") to the trustee.

The settler - The settlor's function is to offer the assets to the trustee to hold for the benefit of the trust's beneficiaries on the terms and conditions set out within the trust deed. The settlor executes the trust deed and then will normally, have no further involvement in the trust.

The trustee - The trustee is responsible for the trust and its assets. The trustee has broad powers to execute the trust, and manage its assets. In a family trust, the trustees are usually Mum and Dad (or a company of which Mum and Dad are the shareholders and directors). Their children and any other dependants tend to be listed as beneficiaries.

The trust information here should be considered general in nature, and by no means interpreted as legal advice.

You can find out more about trading CFDs in your trust account by downloading our free CFD trading guide.

Why trade CFDs?

Wed, 16 Jun 2010 10:06:00 GMT

Benefits of trading CFDs

CFDs are derivative products that offer distinct benefits including:

Liquidity
Traded on margin
Traded long or short
Traded online
Low transaction cost
Access to international markets
Benefits from dividends

Liquidity

CFD prices are obtained directly from the underlying market. This means CFDs give you access to the liquidity in the underlying market, plus liquidity offered by the CFD provider. Most of the time there is much more liquidity in the CFD market than in the underlying or physical market due to the higher number of participants including private and institutional traders.

Trade on margin

CFDs are traded on margin, typically from 5-10% to for shares and 1% for indices. This means a more efficient use of your capital as you only need to allocate a small percentage of your funds to secure a trade. This also enables you to magnify the returns on your investment with a much smaller capital outlay.

Trade long and short

Before CFDs, going short a stock could only be done through a traditional broker that would charge hefty fees on top of the normal brokerage. With CFDs traders can now go short any position or market without any extra cost. Going short is as easy as going long with CFDs.

Going short also provides another benefit that was not available before. Your CFD provider will pay you interest on a short CFD position. This is similar to earning interest on your bank account balance.

Trade on-line

With an estimated 13.4 million Australians with Internet access online share trading has also been on the increase, giving traders more control and constant access to their positions. Most CFD providers offer free software and CFD trading platforms that allow traders to place orders online even outside normal trading hours.

Low transaction cost

Trading CFDs can cost you as low as $10 each way compared to traditional stock brokerage rates of around $25-30. Although transaction costs are a small portion of your overall trading cost, they have an impact on your bottom line once the volume of your transactions increases.

Access to international markets

CFDs open up a wide range of trading instruments. Most CFD providers offer CFDs on Australian and International shares, indices, sectors, commodities, foreign exchange and treasuries. Most of these markets were not available or accessible to private traders before due to the complex nature or complicated set up of traditional brokerage accounts.

Receive benefits of dividends and stock splits

As CFDs reflect the price and movement of the underlying physical share, they also mirror any corporate actions that take place in the underlying share. This means, if you are a holder of a share CFD, you will also receive dividends and stock split benefits once they become due. However, you are not entitled to any voting rights or franking credits. On the same vein, when you are short a share CFD and the underlying stock goes ex-dividend, you have to pay the dividend amount as you would if you were short the physical share.

To find out more about CFDs, you can download IC Markets FREE CFD education guide.

CFD Trading Psychology

Sun, 13 Jun 2010 07:07:00 GMT

Contract for difference traders are not just competing with each other in the market. They are competing with themselves. Traders can be emotional and irrational, and that can make them their own worst enemies.

Feelings and Instincts can bring trading successes, but they are more likely to result in trading losses unless we learn to be in control of them. This is why appreciating trading psychology is vital.

Many CFD traders would like to disconnect themselves from their feelings. Unfortunately, this is not possible, and some feelings may even add to their trading successes. Therefore, it is more useful to learn to understand yourself as a trader, recognizing your own strengths and weakness, so that you can decide on a trading style that suits you best.

In this section, you will learn about four psychological biases that may adversely change your trading results, and you will understand what you can do to overcome them. The biases are:

1.         Overconfidence
2.         Anchoring
3.         Confirmation
4.         Loss aversion

1.         Overconfidence Bias
Overconfidence bias is an magnified belief in your competence as a trader. Any trader who finds themselves thinking that they know the business inside-out and that they have nothing more to learn and that profits are theirs for the taking, may well suffer from an overconfidence bias.

Dangers of Overconfidence
Overconfident traders tend to get themselves into trouble by trading too frequently or by placing tremendously large trades with the plan of making a killing. It's not inevitable, but an overconfident investor invites misfortune.

Are You Overconfident?
If you want to identify whether you have a tendency to be overconfident, ask yourself, “Have I ever delayed or reversed a decision because I couldn't accept that I was wrong?” Likewise, you could ask yourself, “Have I ever placed more on a trade than what I know is really sensible?”

Overcoming Overconfidence
One way to overcome an overconfidence bias is to stick to a strict set of risk management rules. These rules should limit the number of markets you invest in, the number of Contracts for difference you trade at one time, how much you are willing to risk on any one trade and how much of your account are you willing to lose before you take a break from trading and re-evaluate your trading strategy.

2.         Anchoring Bias
Anchoring bias is a perception that the future is going to look very similar to the present. When you anchor yourself too closely to the present, you may fail to notice dramatic changes in the offing.

Dangers of Anchoring
Anchored traders tend to get themselves into trouble because they wrongly believe that current trends will never end or that companies they've always followed will never let them down. Because they are emotionally attached to a Contract for difference, they continue to make investments in a way which is not optimal in changed circumstances. With each trade, they lose more money because they are bucking the trend.

Are You Anchoring?
If you want to know if you have any anchoring tendencies then ask yourself, “Have I ever lost money because I couldn't accept that a trend had ended?” If you have done this, you need to be aware of that tendency.

Overcoming Anchoring
One way to overcome anchoring is to seek a new perspective. Look at different time-frames on your charts. If you usually rely on hourly charts for data, look instead at the daily and weekly charts to examine long-term trends as well as levels of support and resistance. You could also examine shorter-term charts to see if trends are reversing.
Broadening your standpoint in this way will help you to avoid anchoring yourself to any one point.

3.         Confirmation Bias
Confirmation bias is the habit of only looking for information that supports your beliefs. If you anticipate the price of BHP Billiton (BHP) is going to rise, for example, you will only really take in news and data that support your belief.

Dangers of Seeking Confirmation
Traders who pursue confirmation of their beliefs tend to miss warning signs that would otherwise protect them from preventable losses. Ultimately, this can only lead to losing money because decisions to buy or sell, or even to do nothing, are being made on false premises.

Do You Seek Confirmation?
To know if you have any confirmation bias tendencies, ask yourself, “How often do I look for signs that I may be wrong in my analysis?” If your answer is rarely or never, you may be a confirmation seeker and you need to actively work to ensure that such a bias never influence your better judgment.

Overcoming Confirmation Bias
One way to overcome confirmation bias is to find an individual or group with whom you can discuss your trading. You don't need somebody who will simply flatter you or perpetually agree with you. Traders with different views and thoughts will help you to be more vigilant. Sometimes your convictions will only be reinforced by talking with other traders, but at other times, they may force a total and timely rethink.

4.         Loss Aversion Bias
Loss aversion bias is based on the theory that losing $1,000 will have a larger impact on you emotionally than gaining $1,000 will. In other words, fear is a more influential motivator than greed.

Dangers of Loss Aversion
Ironically traders who fear losses are much more likely to hold onto losing positions than traders who are able to accept short-term losses and exit their trades. A reluctance to give up a losing position will not only cause you to incur larger losses but also stop you from finding better trades.

Do You Fear Losses?
If you want to know if you have any loss aversion tendencies, ask yourself, “Have I ever held onto a losing position, beyond the point where I knew I should have quit, because I hoped the trend would reverse and wipe out my losses?” If you have, then you need to be aware of that tendency.

Overcoming Loss Aversion
One way to overcome a loss aversion bias is to trade with automatic stop-loss orders. Many traders trade with just a mental stop-loss that, when it comes to the crunch, they fail to honor. They let their emotions interfere with their better judgment as they try to justify irrational decisions that prevent them from quitting and cutting their losses.

In summary, as soon as you buy a CFD you should set your stop-loss order. It should be physically set, operate automatically, and you should respect it.

If you would like to learn more about the psychology of trading you can download our free educational guide.

Market Made or Direct Market Access (DMA) CFDs

Sun, 13 Jun 2010 07:01:00 GMT

There are two main types of CFDs, these are:

1. Direct Markets Access and;
2. Market Made

Some CFD providers only offer one type of CFD others offer both. The most common type of CFD is the market made variety, typically this type of CFD is offered by CFD providers that also offer spread betting and originate in the United Kingdom where spread betting is popular.

All CFD traders or potential CFD traders should understand the differences between the mechanics of both types of CFDs and the fee structures associated with them.

Direct Market Access (DMA) CFDs
Direct Market Access (DMA) CFDs mirror the price and liquidity of the underlying instrument on which the CFD is based. DMA CFDs are the most fair and transparent type of CFD available. When trading DMA CFDs the trader is a "price maker". DMA CFD traders can enter and see an equal order flow onto the underlying exchange, this guarantees that at all times they receive true market prices on every trade. DMA CFDs offer traders real time execution, guaranteed market prices and participation in the order book and opening and closing phases of the market this provides a significant advantage for scalpers.

DMA CFD providers do not profit directly from performance of the CFD trader, as all CFD positions are 100% hedged. This means that if you buy the CFD, the provider will instantly buy the underlying equity as their hedge trade.

Points to note
•The quoted price of DMA CFDs is the same as the price quoted on the underlying exchange;
•DMA CFD orders flow directly onto the underlying exchange;
•DMA CFD traders can be a price takers or makers and participate in the market depth on the exchange, and;
•DMA CFD traders can participate in opening and closing market auctions.

Market Maker (MM) CFDs
A Market Made CFD does not mirror the price on the underlying market. Market Makers that offer Market Made CFDs derive their CFD prices from the underlying instrument on which the CFD is based rather than quoting the exact exchange price of the instrument like DMA CFD providers. Market Makers act as an intermediary to the CFD trade and have the ability to alter the price of the CFD, price alterations often occur in their favor, often resulting in stop orders being triggered and slippage which can add a significant cost to the trade.

Market Makers do not hedge 100% of their CFD positions, typically they hedge only the resulting amount after their clients long and short positions net each other off, however in many cases they do not hedge at all and often directly profit from their client’s losses. When trading Market Made CFDs trades do not flow directly onto the exchange, they are at the discretion of a dealer as a result orders are filled slower and at inferior prices.

Points to note
•MM CFD traders do not receive the same prices as those quoted on the exchange;
•MM CFD spreads are often widened and orders re-quoted;
•Market Makers are price takers not price makers, this means MM CFD traders cannot participate in the underlying order book;
•MM CFD traders cannot participate in the opening and closing market auctions and;
•Some Market Makers profit from the performance of their clients positions.

Market Made CFDs do have some benefits over DMA CFDs in that they are generally offered over a larger range of stocks and indices. Market Makers are also able to offer additionally liquidity in larger stocks, the reason for this is because they have positions on their internal order book which they would like to clear.

Market Makers often re-quote clients when they attempt to buy or sell a CFDs, re-quotes occur as a result of the Market Marker adjusting their internal order book to compensate for a lack of liquidity at a particular price level on the underlying exchange.

So which type of CFD should you choose:
When comparing the two types of CFDs you should consider whether you’re trading style and the instruments that you trade suit either a Market Made or Direct Market Access model. Typically scalpers and active traders choose DMA CFDs over MM CFDs as there are no re-quotes and the trader can be a “price maker” through participating in the underlying order book of the stock which they are trading. Market Made CFDs are popular with longer term traders and those that prefer to trade indices and forex. The reason for this is than often Market Markers offer both indices and forex commission free. Often DMA CFD providers do not offer indices and forex on a DMA basis as by their very nature they are a market made product and cannot be traded on an exchange.

Before choosing a CFD provider you should analyse your trading strategy and choose the type of CFD that suits you best. If you are unsure of your trading strategy or would like save the hastle of having multiple CFDs account with multiple providers you should choose a CFD provider that is able to offer you both Market Made CFDs and DMA CFDs.

Other types of CFDs
It is also worth noting that there is a third type of CFD, these are exchange traded or ASX CFDs and are offered by the Australian Stock Exchange. ASX CFDs are not popular amongst traders or investors due to their lack of liquidity and wide spreads. ASX CFDs are only offered over a small range of securities, indices and foreign exchange pairs. ASX CFDs do have the benefit of being cleared and traded on an exchange however as there are no significant advantages of this type of CFD traders prefer either the Market Made or Direct Markets Access CFDs.

With IC Markets you can trade either Market Made CFDs or Direct Market Acess CFDs. IC Markets understand traders have varying styles and strategies that suit each type of CFD.

To find out more about CFD trading you can download our guide on DMA CFDs for free.

Pairs Trading CFDs

Sun, 30 May 2010 07:21:00 GMT

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

Most traders buy CFDs with the expectation that the market will rise, few traders take short positions with the view the market will fall. Pairs traders are indifferent to market direction and don’t mind which way the market moves so long as they choose a strong pair of related securities.

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

Most traders adopt pairs trading strategies when there is uncertainty as to the direction of the market. The reason for this is that it removes the market risk, rather whether the trade makes money will depend on whether you buy a CFD that will outperform or sell a CFD that will underperform. A typical example of this would be buying Commonwealth Bank (CBA) and selling ANZ Bank (ANZ), because you expect that CBA will outperform ANZ. Should both stocks rise or fall you will be indifferent, however should CBA rise and ANZ fall as you expected, you will make money. If CBA falls less than ANZ you will make money likewise if CBA rises more than ANZ you will also make money.

There are a number of benefits of using CFDs in your pairs trading strategy. One of the main benefits is the financing offset that will be achieved when you earn a financing income on your short position. Take the above example for instance, when you open your long CFD position on CBA you will pay a small financing charge however when you go short the ANZ CFD you will receive financing income. Although the offset is not 100% it will most certainly reduce the cost of the trade. In many ways pairs trading as a short to medium term strategy and can be much cheaper and less risky than simply opening a naked long or short position.

Pairs trading is not only commonly used when trading share CFDs but has also become very popular for use with indices. When using CFDs over indices traders can take the view that one index will outperform the other. An example of this may be the US market versus the Australian market. In this example you would buy the ASX 200 index CFD and sell the S&P 500 index CFD with the view that the Australian market will outperform the US market.

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

An example of sector trading would be the resources sector versus the ASX 200 index. You might be of the view that the resources sector is overvalued relative to the market and will underperform the market, you would short the resources sector and buy the ASX 200 index. Alternatively you may feel that the market will retreat and money will move back into the defensive stocks, in this case you would buy the healthcare sector and short the energy sector. When choosing sectors you should consider their weighting within the overall index as this will help you determine the sectors correlation to the overall market.

Pairs trading can be done on just about anything except currencies which by their very nature are already a pair’s trade. A common pairs trading example is illustrated below.

You have the view that ANZ is undervalued and trading on much lower earnings multiples than CBA, and will therefore outperform CBA. The pairs trade is go long ANZ and short CBA.

You buy a $10,000 worth of CFDs over ANZ and sell $10,000 worth of CBA CFDs. The margin on each position is $1,000 or 10% of the value of the contract.

ANZ CFDs are trading at $22, your $10,000 investment gets you 454 CFDs. CBA CFDs are trading at $52, your $10,000 investment gets you 192 CFDs.

Your pairs trade would be ‘buy’ 454 ANZ CFDs and at the same time ‘sell’ 192 CBA CFDs.

Typically CFD commission rates are $10 or 0.10%, your trade will cost you $10. As the trade consists of four trades (buying and selling) your total commission would be $40 ($10 x 4).

Let’s assume that ANZ rises to $30 and CBA rises to $55. In this scenario you would make a profit on your ANZ position and a loss on you CBA position.

Your positions would now look like this:

Long 454 ANZ shares @ $30 = $13,620
Short 192 CBA shares @ $55 = $10,560

ANZ profit     = $3,632
CBA loss       = -$576
Commission   = $40
Gross profit   = $3,016

To find out more about CFD trading visit our CFD page.

Advantages and disadvantages of Forex robots

Mon, 24 May 2010 00:12:00 GMT

The growing amount of misinformation surrounding forex robots is making it increasingly difficult for the average retail trader to distinguish whether or not they are an effective means of getting exposure in the forex market. This misinformation is due largely to the fact that the internet is saturated with content from robot developers more interested in lining their pockets, than growing your trading account.

I should point out that this article is by no means an attack on the forex robot community, rather it is an unbiased perspective aimed at educating traders so you can make more informed decisions when entering the markets. By the end of this article you will know some of the important pros and cons of robots as well as ways to filter the good from the bad developers.

The developers of robots focus on a few key selling points in order to market their product effectively. These selling points have clear advantages and disadvantages and I will focus on these to help you distinguish whether or not robots remain an effective investment vehicle for yourself.

Access to markets
Forex robots provide traders access to markets 24 hours a day 5.5 days a week. Since most retail traders do not want to spend that much time in front of the computer, this is an effective way to capture more opportunities and potentially increase profits. It also allows trader’s access to a greater variety of currency pairs, more than they would be able to analyse and trade themselves.

Although they can generate more opportunities, robots do have their limitations. Robots limit which broker you use as most robots aimed at the retail community will only run on MT4. The opportunities you are then able to take are limited by the spread your broker offers for that particular currency pair, (some robots will not take opportunities if the spread is too wide). For this reason it is recommended that you chose an MT4 broker that uses and electronic communications network (ECN) feed, as the spreads are typically tighter. Another limitation of robots is the fact that they are typically run off your computer as a virtual private server (VPS), this means that they need exclusive access to your trading account and require you to keep your computer running and platform open to get continued access to the forex market 24/5.5. Usually you will have to run two trading accounts if you wish to do your own discretionary trading as well as the robots.

Built in strategy
One of the biggest challenges facing new traders is developing an understanding of the market, and then building a strategy around that understanding. This can take years and thousands of dollars to develop. Robots remove the need for traders to build a strategy or even understand the market. Assuming the robot is profitable; this may provide traders with a more cost effective way of entering the market, increasing their chances due to the robot having a superior strategy.

It should be noted that in order for the robot to be effective the owner will still have to ‘tweak’ it for optimal results. In this situation it would be beneficial to have some understanding of trading or the forex market so the parameters can be set as optimally as possible. In my opinion, it is up to the vendor of the robot to provide its customers with continued support and instructions on how to optimise the robots settings for best results.

You should also take into account ‘who designed the robot?’ was it designed by a respected company with years of market experience, or an IT guru with internet marketing experience. The long term effectiveness of the strategy of the robot will be dependent on this factor.

Trade execution
Trade order execution is paramount to your trading and ultimately profitability. Robots can be better with regards to order execution due to the speed with which they think and act across multiple currency pairs. This provides a distinct advantage over typical discretionary trading, as more trades can be executed sooner, increasing exposure and potentially profits.

There is some disparity between demo and live trading with robots, due to execution of orders further illustrating the importance of the broker you choose to run your robot with. As was said above an MT4 broker using an ECN as opposed to a deal desk would be optimal for results.

Psychology
Forex robots remove the need for the owner to think when engaging in a trade. One of the three pillars of an effective trading system; psychology, is what prevents traders from turning a winning strategy into a successful and profitable system. The owner simply turns the robot on, enters parameters specific to their risk and trading profile, and the robot does the rest. This is one of the most attractive features of a robot, leaving the trader to tweak the system based on statistics and profitability rather than emotion.

Money management
Forex robots can come with built in money management profiles that can be customised to meet the traders risk profile. Most new traders enter the forex market with little or no understanding of money management, so having a robot with a built in money management system puts them at immediate advantage than if they were to begin trading on their own. The money management employed by the robot is especially important and consideration should be given to this when choosing a robot.

Market condition
Although this isn’t a point highlighted by robot developers when typically talking about the advantages and disadvantages of robots, I think it’s important to highlight that this is one of the key reasons robots can fail. There are so many variables in the forex market giving rise to changing conditions it is hard for robots and their developers to keep up. Robots for example a robot cannot detect when there is thinner liquidity giving rise to sudden sharp price movements, or breaking news causing volatility. As humans we can make ourselves aware of these factors and adjust our approach immediately.

When there are so many variables affecting currencies at any one time giving rise to market change and volatility, it seems almost impossible that a piece of software could possibly factor in all these changes to remain profitable and the strategy valid. Because of this robots are inherently designed to fail. This problem can be corrected if the robot is constantly updated and the strategy refined to adapt to changing market condition.

Cost
The last point to consider is cost. With robots, like anything in life, you get what you pay for. More expensive robots are likely to have more research and development behind them. While a support team will help you get setup and customise the robot to your settings, as well as provide you with updates. The less expensive variety has online manuals, placing the onus of tweaking the settings of the robot on the trader.

When considering the price of the robot, remember what it is you are buying and the costs associated with the alternative. The alternative, is spending thousands of dollars and hours educating yourself about the forex market and then, trading by yourself with no guarantee of success.

As you can see above, forex robots are not a sure road to success in the forex market. They have their obvious advantages and disadvantages, but in the end it is the job of the trader to take into consideration these points and question whether it still represents a viable way of getting exposure in the forex market.

It is important to note the reason forex robots have gained so much popularity is because there is a lucrative in selling them. The marketing teams behind robots sell hopes and dreams, which for the most part is what the average retail forex trader desires. They represent an easy solution to tradings biggest problem, making money.

If you take anything from this article, let it be the fact that it is essential to have at the very least a basic understanding of the forex market and trading before engaging in any sort of trading, even through the use of a robot. If a trader is going to use a robot I would suggest doing your homework and finding out the following: who made the robot, their experience in the markets, years developing robots, support staff if any, do they help you optimise the robot, live trading account results, as much information about the strategy and money management system as possible and how many markets it covers. Once you have this entire information look at the costs. If a company can’t provide you with this information they aren’t worth your time or money!

For more information on how your can trade forex with IC Markets visit our forex education page and download our educational guide.

Day trading CFDs

Sat, 22 May 2010 11:24:00 GMT

The leverage CFDs offer makes day trading attractive, however, before commencing a day trading strategy you should asses the benefits and downside to using CFDs.

Below are some of the benefits of using CFDs in your day trading strategy:

Low Commission
The commission rates on share CFDs are much less than on traditional shares, this means that you can trade more actively for smaller price movements making CFDs extremely cost effective for day traders.

No financing charges
If you do not hold your CFD position open overnight you will not incur any financing charges

Risk minimisation
You are not exposing yourself to the risk of a stock or share CFD gapping up or down overnight as a result of global market movements.

Free cash flow
As you are only holding your positions for a short time frame you are not locking up you cash, this means that when you see a trading opportunity you will have sufficient funds in your account to place the trade.

Although there are many advantages of using CFDs in your day trading strategy there are also some downsides, these are listed below:

Time
As all of your trading will occur during market hours over short time frames you need to monitor your trading screen on a regular basis, this process can be time consuming.

Decision making
As time is of the essence in day trading it is important to have a very good idea about your trading system as you will have to make quick decisions about your trades.

Capital outlay
Day traders focus on profiting from smaller price movements, therefore in order to make large amount of money, it is necessary to start off with a bigger float or use more leverage.

If you have the time, a good intraday strategy and can afford to start trading with a larger float, then day trading may be the right trading style for you. Before rushing out, opening a CFD account and becoming a day trader you should consider the following tips:

Trading CFDs is very much like running your own business, however, as CFDs are leveraged, there is a chance of losing more than your actual deposit, using stop loss orders and having a good money management plan will minimize this risk.
Before starting to trading, ensure that you understand and stick to your trading strategy. You should start by practicing your trading system in a demo account.
All traders will have both winning and losing trades. Trading a profitable trading system is the most important factor in making profits overall. It is likely that when you start out trading you will have some loosing trades. However, despite the fact that the number of losing trades is often more than the number of winning trades, the size of the winners are generally considerably larger than the losers. In order to make consistent long term profits, you need to properly back test and understand your trading system.
Measure the performance of your trading system, you need to look at its profits as a percentage of your initial cash float, the maximum historical drawdown as a percentage of your initial cash float, the steadiness of returns, and the profit-loss ratio combined with the win-loss ratio.
Choose your CFD provider carefully. Each CFD provider offers a different number of CFDs some of which are short sellable and others not. The trading platform each provider uses determines the type of orders that you can use in your trading strategy. You will need to consider all of these issues as they may have an impact when back testing your trading system.

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