Most people don’t know the difference between OTC or over-the-counter CFDs and DMA or direct market access CFDs (DMA CFDs), before I start out it is important to ensure that the differences between both types of CFDs are clearly explained as there are important advantages and disadvantages of each type that all traders should be aware of.
Understanding the difference between the two types of CFDs is relatively easily explained. In essence DMA CFD providers allow all of their clients CFD trades to flow into the underlying order book of the stock over which the CFD is based, this allows DMA CFD traders to participate in the market depth a have their orders partially filled in addition to allowing the trader to be a price maker rather than a price taker, OTC CFD providers on the other hand often match orders against another clients order or their own internal liquidity rather than placing the order in the underlying market. OTC CFD providers have the advantage of being able to offer CFDs over indices and forex and are more suited to traders looking to access multiple asset classes, whereas DMA CFD providers are only able to offer CFDs over shares and are better suited to those looking to trade shares on leverage or CFDs on small cap stocks.
Now that you know the difference between the two types of CFDs on offer it is important to understand the trading platforms available. As CFDs are traded online it is important to ensure that you choose the right trading platform that suits your trading style, the most popular DMA CFD trading platform is webiress plus.
Webiress plus is the fastest and most reliable DMA CFD trading platform on the market today. Webiress plus started out its life as a share trading platform and soon after was adapted for CFDs. The platform in web based and uses java, like all java applications it is important to ensure that you have the latest java version installed on your computer in order to experience the rich functionality of the software.
Webiress plus can be quite daunting for beginner first starting out however once you understand the power of the software it is unlikely that you will use anything else. Configuring your initial layout is often the most difficult part however this is relatively simple if you stick to the basics. Some of the essential features of webiress that you should setup to display permanently on your platform workspace are a watch list, your portfolio, an order pad, a market depth window and of course the market map. Having these features open on your workspace are essential when you first start out and will prevent you from making some common and easily avoidable mistakes like not knowing whether an order has been cancelled or not.
Let’s now take a look at the importance of each of these key webiress plus features.
Watch List Having a watchlist window open is essential when you are trading as is allows you to monitor the CFD positions that you have open in your portfolio and any others that you may be interested in trading. The watchlist list will enable you to monitor prices without the need to have multiple price windows open.
Portfolio The portfolio window is arguably the most important feature in webiress plus as this allows you to monitor the essentials including your free equity, margin requirements, portfolio value as well as both your realised and unrealised profit and loss. From the portfolio window you will also be able to monitor your open positions and see you average price, market to market value and unrealised profit or loss on each individual position.
Order Pad Using the order pad window is critical if you are managing multiple orders, the order pad window allows you to track the status of your orders in the market. After placing an order using webiress plus it is essential to check whether the order has successful reached the market, this can be done using the order pad, it is from here that you will also be able to check for partial fills and confirm the status of order cancelations.
Market Depth Having access to market depth is essential when trading DMA CFDs as this will allow you to see your orders in the underlying order book of the share over which the CFD is based, not only will you be able to see your orders in the depth but you will also be able to determine where support and resistance levels are by simply looking to see the number of buyers or sellers in the market at each price point.
Market Map The market map is one of the unique features of webiress plus, it provides traders with a visual overview of the entire market at a glance. It is common for traders to use the market map feature to help them identify share CFDs who’s prices have either risen or fallen dramatically across the entire market. The market map is also able to display the market capitalisation of stocks meaning traders can quickly filter out stocks in a particular sector which may not meet their trading criteria.
Now that you are familiar with the differences between DMA and OTC CFDs and understand some of the key features of the webiress plus trading platform you are well on your way to trading. Before you start trading DMA CFDs on webiress plus it is important that you practice using the platform, place some orders and set up a trading workspace that suits your trading style. You can get a free webiress plus demo here.
As every CFD trader knows choosing a trade is not always the easiest task there are CFDs on thousands of shares to choose from but which ones do you trade? Most traders follow a particular style of trading and choose their CFDs based on certain criteria such as liquidity and price, however not all traders have a trading plan but rather base their investment on factors such as dividend returns or company valuations. Even if you don’t have a trading strategy there are a few important factors that you should consider when choosing which CFD to trade online, a few of these factors are outlined below.
Seasonality With thousands of share CFDs to choose from one factor most people overlook when they start trading is share CFD price seasonality, this is one of the most obvious factors influencing share CFD prices. If it is summer you should consider CFDs which historically have price moves up during this season or price moves down if you are bearish, examples of seasonal stocks include retailers.
Technical Analysis There are thousands of indicators available with the most common ones being MACD, volume, moving averages, RSI, CCI, stochastics and bollinger bands. Don’t get confused by the many thousands of indicators available, keep it simple in the beginning. Using too many indicators can be confusing and result in mixed signals, you should start by using one or two simple indicators first like MACD and moving averages for example, once you are accustomed with these indicators only then should you start experimenting others. Some of the most successful traders solely rely on technical analysis however when starting out it is advisable not to solely rely on technical analysis alone when making your trading decisions.
Company Fundamentals Most people overlook company fundamentals when choosing a CFD to trade. One of the most important aspects in choosing a share CFD is the company’s balance sheet and profitability, reading over the company’s balance sheet is essential before making medium to long term investment, of course if you intend to engage in short term trades this is less important.
Company Management Company management is something most CFD traders fail to consider. Investing in companies who’s management have a good track record is always a good start. Of course management is more important to consider for medium to long term traders, and less important for short term investors looking to take advantage of short term price fluctuations.
Global Market Conditions It is important to monitor global market conditions as market movements are ultimately dictated by the global economic climate. Currencies, commodity prices and global indices all have an influence on the local stock market and ultimately you CFD positions.
Of course these are just some of the factors CFD traders should consider when entering into a CFD position. Every trader enters into CFD positions using different criteria that suits their risk profile and trading habits, it is always important develop your own trading plan to site your risk profile and lifestyle.
To find out more about CFD trading you should take a look at this free CFD guide.
Let’s face is not everyone is cut out to be a scalper or day trader after all sitting in front of your PC for hours on end watching numbers go up and down can be stressful. For most people day trading is too difficult as it’s a high risk reward job and requires a medium to large capital outlay at the start. The emotion of day trading often gets to novice traders, being able to manage your emotions is what distinguishes good traders from bad. The fact is not everyone can be a day trader.
When looking inside them minds of successful traders there are certain characteristics that always stand out. Some of the most common characteristics are:
Analytical Mind Good day traders have analytical minds and are able conduct quick calculations and think on their feet, they must be able to identify trends and patterns without relying on a fancy chart or computer program.
Confidence All successful day traders are confident, they are decisive, able to think quickly and have no time for uncertainty or self-doubt as this is what often leads to missing some of the best trading opportunities of the day.
Self Belief Self belief goes hand in hand with confidence, you have to believe in your decisions and run with them. If you are indecisive perhaps day trading is not be a suitable career for you.
Discipline All successful day traders need discipline, once you have a plan stick to it. When day trading you can lose money as well as make money, as losses can result in an end to your career you need to manage your risks, know where to set your limits and stop loss orders accordingly. Once you have met your objectives do what you planned don’t let greed or fear take control of you.
Decisiveness Good day traders don’t hesitate, they run with their decision and trade what they think is right, hesitation often results in missing out on good trading opportunities.
Passion Day trading involves being passionate about the market, a good day trader never switches off tracking the market day in and day out following news globally, analysing charts and looking at quote screens. This all has to be processed as quickly as possible, this is of course is what will give a good day trader an edge.
Dealing with Failure You can never expect to win all the time this is a motto every day trader should remember. You will lose on some occasions and win on others however, as long as you ensure that over time you win more than you lose you will always be successful. If you cannot accept losses then day trading is probably not for you as all good day trades will suffer losses at some stage.
Concentration When day trading you will need to quickly analyse allot of data and reports in order to arrive at decisions quickly and act fast, this all happens in real time so you must be able to focus and avoiding all distractions during the trading session.
If this sounds like you then perhaps you should take up a career in day trading and learn more about CFDs in this very informative free CFD guide.
It’s not hard to find blogs and forums where people talk about the benefits of CFDs over shares but have you questioned whether the people actually writing these comparisons are traders who have experience in both financial instruments or are they just paid authors out to promote CFDs. In this quick review we will touch on the differences between both CFDs and shares and highlight the unique aspects of each product that has allowed traders and investors to harness the power of their investment portfolio from the comfort of their own lounge room.
CFDs and shares are very different not only in the way they work but also in how they are traded. One of the fundamental differences is the fact that CFDs are an over the counter or OTC product meaning your transactions are not conducted on an exchange but rather with the CFD provider that you are dealing with. Shares on the other hand are traded on an exchange meaning that you are buying and selling off other people in the market with your stock broker simply acting as a conduit providing you with a gateway to the market.
So now that you know one of the most important fundamental differences between CFDs and shares let’s get into some of the key mechanical differences in detail.
Settlement One of the most apparent differences between both products is the way in which they are settled. When you buy shares on the stock exchange you don’t have to pay for the share for three days, conversely when you sell shares you do not receive any money for three days. The transaction day plus 3 days or T+3 is the settlement period set by the clearing house not the broker. Of course when trading CFDs there is no clearing house involved as the transaction is OTC this means the your CFD provider essentially sets the rules, as CFD providers typically do not want to wear the risk of having the settlement of a transaction fail they will ask for the money upfront, this concept of same day settlement is known as T+1. It’s worth noting that some online share brokers also apply T+1 settlement to minimise the risk of settlement failure.
There really is no real advantage of T+1 or T+3 settlement as ultimately the net effect is the same, however most active traders prefer same day settlement for the simple reason that it makes their cash flow easier to manage.
Leverage Unquestionably the most important and apparent difference between CFDs and Shares is the concept of leverage. By the very nature of the instrument CFDs are leveraged meaning that for a relatively small outlay you can obtain a relatively large exposure to a share. Typically the margin rate on most CFDs is around 10% this means that with a margin of $1,000 you could potentially gain $10,000 exposure to the price movement of a share. If you were to buy $10,000 worth of shares you would have to outlay the full amount, rather than the $1,000 required to open your CFD position, providing a more efficient use of capital and return on your initial investment.
It is important to be aware that although leverage can work in your favour, it can also work against you, this means that your profits and your losses are amplified however you can also potentially loose more than your account balance. With share trading on the other hand you cannot lose more than the amount paid, however you profit potential is also reduced.
Short Selling Equally CFDs and shares can be short sold although the process is often easier with CFDs for the simple reason that short sell transactions can be done online rather than over the telephone. The main reason why short selling shares directly is not a simple process is due to short sale reporting requirements which must be disclosed via tagging short trades executed on the exchange. Although CFD providers also have short sale disclosure requirements to meet they are not required to tag short trades for the simple reason that they often pre borrowed stock to cover any short sales, essentially this means that they have covered their clients short positions before the client even places the trade.
Costs of Trading A common myth in the market is that CFDs are cheaper to trade than shares, however this is not always the case. Financing plays an important part in CFD trading however most traders often forget about this. Without conducting any mathematical calculations as a rule of thumb an AUD $100,000 position will cost you around $25 per night in financing, on this basis if you hold a position open for at least 5 days this is the equivalent on paying $125 in brokerage or 12.5 basis points. Of course if you don’t have the capital it may be worth paying this however if the margin of the CFD is high you should think twice as CFD financing is not calculated on the borrowed amount but rather on the full notional value of the position as such it may be more economical to pay for your position outright and pay a higher upfront brokerage cost.
CFDs can of course be a cost efficient trading tool but this is only when positions are held open for a relatively short period of time however, share positions on the other hand can be held open for as long as you like with only the initial transaction cost payable, this is an important difference to keep in mind.
Despite having to pay financing costs one of the benefits of CFDs is that you are not required to pay any GST on your commission, although a relatively small amount it is worth considering the impact of GST on your trading costs if you are an active trader.
Unrealised Profits As CFDs are marked to market on a daily basis your profits or losses are also debited or credited from your account daily this is very different to trading shares where profits or losses are only realised at the time of sale. In this regard one of the benefits of CFDs is that you can utilise your unrealised profits without having to close your positions, naturally there is also a downside to this in that your losses are realised on a daily basis meaning that unlike share trading the free equity in your account may decline without you closing positions.
Only five differences have been touched upon in this article, in later articles we will cover some additional differences between shares and CFDs. In the meantime if you would like to find out more interesting information about share and CFD trading you can download our free CFD guide.
Australia has the highest per capita share ownership in the world so it’s not surprising that there are so many online traders. The recent explosion of the speculative resource sector has turned everyday people into professional investors, simply through trading shares online. Recently we have seen some phenomenal price moves never before seen in the micro cap resource sector of which many online CFD and share traders have taken advantage of.
Of course before you can get started online trading you must have the right tools for the job. Most online traders can get by with a one PC and monitor and an ADSL internet connection however the more serious online traders tend to use two monitors and have two internet connections to ensure that if one connection goes down they can still trade. Of Course having the right hardware does not mean much if you don’t have a broker account and a trading plan.
Most people new to online trading will choose a broker that they can do both the share and cfd trading thorough, there are relatively few of these so make sure that you do your homework and choose the one that can offer you a platform that suits your trading strategy.
Online trading is a lifestyle change and choosing a strategy that suits is important, generally there are three types of strategies short, medium and long term which each requiring a very different level of attention. Of course there is no point quitting you day job to start online trading CFDs and shares if it results in more work not less. Most people give online trading a go for a few months, starting with a relatively small capital outlay before they commit to trading full time.
To learn more about CFD trading you can download and read this free CFD Guide.
There are a number of different types of forex brokers, market makers, fixed spread providers and those offering electronic communication networks (ECN's). A common question asked which most people new to forex ask is which type is best. To help answer this question below is a brief comparison.
Fixed Spread Providers There are quite a few fixed spread forex brokers in Australia some have spreads as low as 2 pips on EUR/USD. Trading on a fixed spread can have its advantages as well as disadvantages. One of the main advantages of trading on a fixed spread is that traders are guaranteed consistent spreads during times of market volatility such as interest rate announcements; these are often the periods during which spreads can widen dramatically without warning often catching novice traders off guard.
Despite having the benefit of a fixed spread during market volatility fixed spread providers will often quote wider spreads during quiet periods, often their spreads are much wider than those offered by market markers or ECN forex providers.
Trading on a fixed spread is often good for newbie traders who are not yet accustomed to the wild price fluctuations of the forex market.
Market Makers There are a few market markers that have given the rest a bad name by trading against their clients and profiting from client losses, however this is not common practice for all market makers only a select few. Generally market makers are able to offer relatively tight spreads across all of the major currency pairs, however it is important to understand that this not always the case if you are looking to trade large parcels or trade around announcements such as interest rates or non-farm payroll.
Some market makers are known to widen their spreads by as much as 50 points during times of market volatility, they often do this to protect themselves from scalpers looking to take advantage of their tight spreads.
When selecting a forex broker who is a market maker you will need to ensure that you do your homework and make sure that they are not one of the few that are actually trading against you and profiting from your losses.
ECN Providers By far the most transparent forex broker model is an electronic communications network or ECN. An ECN broker simply aggregates the best price feeds from a variety of investment banks and always displays the best bid or offer. Most ECN brokers will charge a commission rather than apply a spread to the natural market price this ensures that you are trading on the real market price as set by the world's largest investment banks.
There are many advantages of trading with an ECN broker the most apparent being the spreads offered; often there is no spread or an inverted spread, prices not achievable by market markers or fixed spread providers. During volatile times an ECN will always show the best price available, as ECN brokers rely on a number of investment banks who are actively trading over these periods you will always get the best price and not by subject to extremely wide spreads which you would otherwise get with a market maker.
Of course it is up to you type of forex broker you choose as each have their own unique advantages. You should always make your decision based on the trading strategy that you employ and your level of experience in the market.
To learn more about selecting the right forex broker you can download and read this free Forex Guide.
Nearly all of the CFD brokers in Australia offer CFDs over the shares making up the ASX top 300, the rationale behind this is straightforward, shares with a larger market capitalization are often far more liquid, however, many CFD brokers forget that we live in Australia, a country full of resources and of course also rich in resource stocks and simply don’t offer CFDs over the small and more speculative mining stocks.
Trading CFDs over speculative mining shares can be very rewarding if you select your stocks carefully. Before trading CFDs over speculative stocks you should perform some research on the company. Before selecting your stocks you should ensure that the company has great management and an excellent project. Needless to say if the copper price has gone up and you happen to be looking for exposure to stocks in this sector logically you wouldn’t select a CFD over a stock with gold assets, this is the reason selecting stocks within the relevant sector is also important. It is always imperative that you remember that trading CFDs over speculative stocks has its risks as these kinds of stocks can go up in price just as fast as they can come down.
So why a trade the CFD instead of buying the Shares outright?
The answer to this question is simple and can be summed up in a few words, unrealized profits and losses. Unlike stocks CFDs are marked to market every day meaning that the profits or losses are credited or deducted to and from your account every single trading day. The profits and losses from buying and selling stocks are dealt with very differently in that they're only realized once the stock is sold. Realizing profits and losses each day means that you are able to use your unrealized to profits to buy new positions without having to deposit further money into your trading account, needless to say the same goes for losses in that you'll have to deposit additional funds into your account if the trade moves against you.
It’s imperative that you note the majority of speculative stocks will have a higher margin prerequisite than shares in the ASX top 300, their margin requirement can easily be as high as 100% however the bulk are offered on a margin of 75%. One critical factor to think about here is whether or not your CFD provider will charge you financing on the full notional worth of the position, this could of course be a fairly large amount if the position was on a 100% margin, there are however some CFD providers that will only charge financing on the borrowed amount. It would be far more cost effective to pick a CFD company which will only charge you on the borrowed amount, if the CFD is on 100% margin this will likely deliver a large cost saving.
You can read more about trading CFDs on small cap mining stocks in this free CFD Guide.
CFD trading is a relatively new concept to most traders and investors in Australia, which is understandable given the mechanics of CFDs are different to traditional share trading. Having an advisor or trading mentor who is able to explain the concept of CFDs and assist you to identify trading opportunities is often a relatively safe way for new CFD traders to gain exposure to financial markets.
There are many stockbrokers and financial advisors in Australia who are able to help traders and investors looking to enter the stock market, however very few have an in-depth experience and understanding of CFDs and how they can be used not only as a hedging tool over a share portfolio but also as a great way to gain exposure to global stocks, commodities, indices and forex pairs.
Some CFD providers are able to provide you with basic CFD trading advice and education however many of them will not provide you with CFD trading recommendations. There are however some CFD providers who are able to provide you with advice and trading recommendations, it is these providers that often also specialise in other aspects of money management including financial planning, corporate advisory and funds management. Dealing with a CFD provider that does not solely specialise in CFD trading is often a good idea for novice traders looking for some assistance in managing their trading portfolio and understanding the risks and benefits CFDs.
Dealing with CFD providers who offer an extensive range of products and services aside from solely offering an online trading platform has a number of advantages in that often you will be assigned a personal account manager with whom you can liaise on a daily basis and ask questions. If you require additional services such as being contacted in the event of a trading idea you can also elect this, however you may be charged a higher commission rate when using this service. Often added benefits such as being able to participate in highly sought after placements and IPO’s will also be provided.
In many cases getting CFD trading advice from your stock broker or CFD provider will cost more than trading for yourself online, however the added commission charges are relatively insignificant when you consider the benefits and are far cheaper than the looses that many novice traders incur when placing trades without a well thought out trading plan or strategy.
Before trading CFDs either online yourself or with a CFD provider who is able to provide you with CFD trading advice it is essential that you understand not only the benefits of CFD trading but also the risks. Often newbie CFD traders fail to understand that although the leverage associated with CFD trading can result in gains it can also result in large losses, this is why having an understanding of risk management is important.
To learn more about CFD trading it is advisable that you read this free CFD Guide.
ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers and have their trades filled by multiple liquidity providers in an anonymous trading environment. The trades are done in the name of the ECN broker, providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader. The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price level. A large number of market participants providing pricing to the ECN broker leads to tighter spreads. ECN brokers typically charge a commission for matching trades between their clients and liquidity providers.
Using an ECN broker to trade forex offers a number of significant advantages, the most apparent being tight spreads and deep liquidity. Tight spreads means that day traders and scalpers can take advantage of small price movements on an intraday basis. Deep liquidity means that large volumes can be traded without having any effect on price this is especially important in volatile market conditions and offers significant advantages for traders using automated forex trading systems. These two factors combined mean that you will be able to take advantage of more trading opportunities, more opportunity equals more profit potential.
There are a number of ECN brokers available in the marketplace today with the most common ECN being Currenex. Currenex is typically used by institutions and investment banks and out of reach for most retail traders, however in recent times as the demand for tight spreads and transparency has improved significantly many commonly know retail trading platforms such as Metatrader have been adapted to suit ECN brokers. Now more than ever the bridge between retail investors and investment banks is narrowing.
Of course using an ECN broker will not be of any advantage if you do not have a trading strategy or plan in place. Formulating a forex trading strategy that takes into consideration your risk profile, lifestyle and capital outlay is essential before you start trading. After formulating your trading strategy you should then try a few forex platform demos to determine which platform best suits your trading strategy. Of course it is important that you choose a forex platform offered by an ECN broker. It can often be difficult to determine and ECN broker, however as a rule of thumb ECN brokers will charge commission on your transaction rather quoting you a widened spread.
To learn more about forex trading using an ECN broker you can download our free FOREX Guide.
WebIRESS is one of the most commonly used CFD and Share trading platforms in Australia, being adopted by some of the country's largest online brokers and leading CFD providers. In recent times webIRESS has undergone a makeover, with the latest version webIRESS Plus recently being launched.
WebIRESS Plus offers day traders and scalpers a number of significant advantages over it's predecessor, with the most noticeable being the speed of order execution, additional advanced order types and visual improvements. The significant improvements of webIRESS Plus make it the ideal CFD trading platform for day traders and scalpers looking to take advantage of rapid CFD price movements in the opening and closing phases of the market and during market volatility.
WebIRESS Plus is fast becoming the most popular CFD trading platform in the market due to the significant edge traders are able to gain as a result of the platforms dramatic speed improvement. In addition to the speed improvements in webIRESS Plus, there are now also a number of new order varieties including if-done orders, meaning CFD traders now have more control over their trades with the ability to set and forget orders.
Despite the significant advantages webIRESS Plus offers day traders and scalpers it is important to note that the speed advantages of webIRESS Plus are dependent on the internet connection being used. As an active trader it is always advisable to ensure that you have the fastest and most reliable internet connection possible, this may mean having an ADSL2 or cable broadband connection. Most active traders will always have two internet connections to ensure redundancy should one connection fail.
Active day traders often use the webIRESS Plus platform alongside an advanced charting package or market scanning tool. One of the more common and readily available charting packages is MetaStock another lesser known package is Spark. Spark is popular with more active day traders who monitor many CFDs at the same time and require detailed real-time information relating to price and volume changes which when combined with chart formations allow them to identify trading opportunities such as price and volume breakouts.
Of course a great trading platform, charting package and internet connection alone will not make anyone a successful trader. These are simply tools that will give you the edge over other traders in the market. The most important components of trading are information flow and discipline which when combined with a proper trading plan and tools will help you on your way to becoming a successful trader.
Currently webIRESS Plus is only available from IC Markets. You can download a webIRESS demo to see whether the platform suits your needs.
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