Daily exchange with CFD is a popular strategy. From pattern trading in the US, to daily traders in Europe and beyond, the leverage and costs of CFD operations make it a viable option for active traders and intraday trading. This page provides an introductory guide, as well as tips and strategies for using CFDs, and offers a list of the best daily brokers of 2018.
What is a CFD?
A CFD is a contract between two parties. They agree to pay the difference between the opening price and the closing price of a particular market or asset. Therefore, it is a way of speculating on the movement of the price, without owning the real asset.
The performance of the CFD reflects the underlying asset. Profit and loss are established when the value of the underlying asset shifts relative to the position of the opening price. When trading with CFDs with a broker, you do not own the asset with which you are operating. You are speculating on the price movement, up or down.
*Example of CFD: * Let’s say you select a stock with a sale price of $ 25 and open a CFD at the value of 100 shares. If you buy shares in a traditional way, the cost would be $ 2,500. There may also be commissions or operating costs.
However, a CFD broker will often require only a 5% margin. This will allow you to enter the same operation but with only $ 125. (Actual levels of leverage or margin will vary). Which makes it an attractive hunting ground for the intraday trader. The risk and reward index increases, which makes short-term operations more viable.
When you enter your CFD, the position will show a loss equal to the size of the extension. This means that if your agent’s margin is 5 cents, you will need the shares to appreciate at least 5 cents to compensate.
CFD: Market Reaction
Using the previous example: let’s say that the price of the underlying shares continues to rise and reaches an offer price of $ 26. If you owned the shares, your participation now has a value of $ 2600. A good profit: ignore the costs of commission or operation that the trader made $ 100.
With the underlying shares at $ 26, the CFD would show the same earnings of $ 100, but required less openness, only $ 125. So in terms of percentage, the CFD showed much higher profits. If the market had moved the other way, the losses in relation to our investment would also have been greater: both risk and reward increase.
Of course, there are other benefits of owning an asset instead of speculating about the price. We also ignore commissions and differentials for clarity. But the above illustrates the relative differences in the two investment methods.
Application
Since you are making daily transactions, you probably will not hold any CFD positions overnight. Instead, you are likely to place a large number of CFD transactions in a single day. To maximize your returns, you’ll want to focus on liquid volatile markets. CFD trading with oil, bitcoin and Forex are popular options, for example.
CFD benefits
It is possible that you have already obtained a couple of advantages of the CFDs in the above, but we are going to break them down and add some more.
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Leverage: CFD leverage is much higher than traditional trading. You can get margin requirements as little as 2%. The rate generally depends on the underlying asset. Shares or volatile cryptocurrencies, for example, can reach up to 20%. While low margin rates will allow you to take large positions with less capital, losses will also affect you more.
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Accessibility: the best CFD agents will allow you to operate in all major markets. With so many markets, hours of operations with CFDs are executed effectively 24 hours a day. You should only check the hours in which their brokers operate.
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Cost: CFD trading systems incur minimal costs. You will find that many brokers charge low or no fees to enter and exit operations. Instead, they make their money when you have to pay the spread. The size of the margin will depend on the volatility of the underlying asset. Keep in mind that it is usually a fixed spread.
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Fewer rules: some markets impose rules that prevent a short circuit from occurring at certain times. They may demand higher margin requirements for short circuits instead of being long. However, the CFD market generally does not have such rules, since it does not actually own the underlying asset. This means that there are no borrowing or short costs.
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Less daily transaction requirements: some markets require significant capital to start trading. This limits you to how many operations you can perform and, in turn, how many earnings. Instead, an online CFD trader can set up an account from $ 1,000 to $ 5,000.
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Diversity: whatever it should be, it is important that you find a vehicle with CFD. You can start trading CFD FX, in addition to using CFD treasury, raw materials, cryptocurrencies and indices.
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Risks: Despite the numerous benefits, there are some drawbacks with CFD that you should consider.
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Regulation: The CFD industry is not fully regulated. This means that it is increasingly important that you select the right agent. You must ensure that they are credible and in a solid financial position.
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Margin operations: while the margin increases the profit potential, the risk also increases. It is very easy to lose sight of the total exposure you have when using the margin. Open positions of $ 2000 with margins of 5% mean exposure to contracts of $ 40,000. In fact, you are lending $ 38k from your broker. If markets move against you, losses may exceed deposits. A thorough knowledge of the total exposure is very important.
How to start trading with CFDs?
One of the points in favor of transactions with CFDs is that it is very easy to start it. You will have to follow only five simple steps:
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Choose a Market There are thousands of individual markets to choose from; including currencies, commodities, more interest rates and bonds. Try and opt for a market that you have a good understanding of. This will help you react to market developments. Most online platforms and applications have a search function that makes this process quick and hassle free.
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Buy or Sell Display the operation ticket on your platform and you can see the current price. The first will be the sale price offer. The second will be the offer of the purchase price.
The price of your CFD is based on the price of the underlying instrument. If you have a reason to believe that the market will increase, you should buy. If you think it will decline you must sell.
- Merchant Size You must now select the size of the CFDs you wish to trade. With a CFD, you control the size of your investment. So, although the price of the underlying asset varies, you decide how much to invest. Brokers will have minimum margin requirements, or simply, a minimum amount that is required for trading to open. This will vary active by active. However, the amount will always be clear, as will the total value (or its exposure) of the operation.
Volatile assets, such as cryptocurrency, typically have higher margin requirements. Therefore, a position with exposure to $ 2000 in Bitcoin might need a margin of $ 1000, for example. But a well-operated stock may only need a 5% margin. Therefore, a $ 2000 position on Facebook may only require $ 100 of the account funds.
- Add Stops and Limits This will help you make a profit and limit losses. Most CFD strategies for beginners and experienced traders will employ the use of stop losses and / or limit orders. They relate to your risk management strategy. Once you have defined your risk tolerance, you can set a loss limit to automatically close an operation once the market reaches a predetermined level. This will help you minimize losses and keep your accounts black, which will allow you to fight another day in subsequent operations.
A limit order will instruct your platform to close an operation at a better price than the current market level. If you opt for a trading robot, they will use pre-programmed instructions such as these to enter and exit operations according to your operational plan. These are perfect for closing operations near resistance levels, without constantly monitoring all positions.
- Monitor and Close Once you have established your transaction and loss or loss limits, your earnings will change along with the market price. You can see the market price in real time and you can add or close new trades. This can be done on most online platforms or through applications.
If the stop loss or limit order has not been activated, you can close it yourself. Simply select ‘close position’ from the positions window. You can see your profit or loss almost instantly in your account balance.
Strategies
Choosing the right market is an obstacle, but without an effective strategy, your profits will be few and far between. You need to find a strategy that complements your operational style. That means you must have your strengths, such as technical analysis. It also means that it must match your risk tolerance and financial situation. Two popular and successful CFD strategies and tips are described below:
Breakout Strategy This simply requires that you identify a key price level for a given value. When the price reaches its key level, you buy or sell, depending on the trend. The main thing to remember with breaking operations is to avoid any movement when the market does not provide clear signals.
If you cannot say exactly in which direction the general trend is moving, do not try. This is where detailed technical analysis can help. Use graphics to identify patterns that will give you the best chance of telling you where the trend is heading.
Contrary Strategy This is based mainly on time. His plan focuses on the knowledge that trends do not last forever. If the price of a stock has been in decline, then the point at which it thinks it is near the end of the trend is identified. Then enter a buying position in anticipation of the trend that turns in the other direction.
You can follow exactly the same procedure if the price is rising. You can shorten an action that has increased in price when you believe that a sharp change is imminent. Both wave theory and a series of analytical tools will help you determine when these changes will occur.
CFD Trading Tips
If you are really looking to increase your earnings, consider these tips from the best traders. Learn from your mistakes and hopefully, you will not fall into the same traps that are very expensive.
Control your leverage Leverage is your greatest asset when you have performed the correct operation. The temptation to increase the size of your position when you are winning is hard to resist. However, there is always a loss on the horizon.
Surely, you don’t want to be the trader that turns a small account into a huge account, just to end up again in box one. Therefore, you need to be smart. Nobody wants margin calls and stress that come with big losses. As the famous Paul Tudor Jones said: “Don’t concentrate on making money, focus on protecting what you have.” Having said that, start with little. Keep your exposure relatively low compared to your capital. It is a good idea not to invest more than 3 times the size of your account, especially at the beginning.
As your capital grows and eliminates folds in your strategy, you can slowly increase your leverage.
Make Notes A bit like a diary, but exchange your crush descriptions for entry and exit points, price, position size, etc. This will be your bible when you have to look back to identify mistakes. CFD publications are often overlooked, but their use can be invaluable.
Hindsight is a powerful force, don’t waste it. You can identify patterns, reflect on your operational emotions and rationalize strategies. A thorough operations log should include the following:
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The instrument.
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The time you entered and left the operations.
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Commercial, technical, news-based reasons, etc.
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If it was a gain or loss.
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A review of your operational performance (including if you followed your trading rules)
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What he learned from the trade.
It may seem like a waste of time, but it will allow you to constantly review and improve. It will make smarter and faster decisions, while those who still do not wonder what they have been doing wrong in recent weeks.
Use Stops Correctly So you can minimize your losses and stay in the game. Each operation you enter needs a stop of crystalline CFD. This is because emotions will inevitably be high and the temptation to hold on a little more can be difficult to resist. As William O’Neil correctly pointed out, “letting losses run is the most serious mistake that most investors make.”
Then, define a CFD stop outside market hours and stick to it religiously. This will also help you anticipate a possible loss. Then, you can use the time in which you would be fighting an internal battle to investigate and prepare for the next exchange.
Demonstration Accounts When you have completed your investigation and have finally obtained the capital to begin trading, it can be difficult to resist taking an immediate leap. However, the cunning daily trader will first test his strategy with a demo account.
Many brokers offer these practice accounts. They are financed with simulated money, which makes them the ideal place to make mistakes before your real money is at stake. Not only can you test your strategy and become familiar with CFD trading markets, but it is also an effective way to test your agent’s trading platform. You can make sure you have all the graphing and analysis tools that your operations plan requires. When you feel comfortable and see consistent results in your demo account, then upgrade to a real account.
Education No one likes to hear it, but school is not over. The best traders will never stop learning. You should keep abreast of market developments, while practicing and perfecting new CFD operations strategies. Learning from successful traders will also help. To do all this, you will need to use a variety of resources. To name just a few: Blogs, Courses, Forums, Videos, PDFs, eBooks, Podcasts, Online guides.
Regional DifferencesTaxes
Although you can use CFD throughout the world, your headquarters and the market in which you are operating may cost extra depending on where you are operating. CFD trading in the United States will be different from the United Kingdom, Australia, India, South Africa and Singapore.
This is mainly due to taxes. Countries see CFDs differently. Some consider them a form of gaming activity and, therefore, are tax free. Other countries consider them taxable as any other form of income.
Tax implications in the United Kingdom, for example, will see that CFD trading falls under the capital gains tax requirements. While you get an annual exemption of £ 10,100, any earnings that exceed that will be taxed. This means that you must keep a detailed record of the transactions in order to perform accurate calculations at the end of the fiscal year.
Before you start operating, find out if you will pay personal income tax, business tax, capital gains tax, or if you are lucky, there is no tax. Once you know what type of tax liability you will face, you can incorporate it into your money management strategy.
Final comments
Daily CFDs can be comparatively less risky than other instruments. That said, it will still be a challenge to develop and implement a consistent and profitable strategy. If you want to be a successful CFD trader, you must use the educational resources mentioned above and follow the advice mentioned. As the successful trader Alex Hahn pointed out, “If you master your thinking and your emotions, nothing can stop you. So, the ball is in your midfield now, go and turn it into gold. ”