CFD Providers: How To Choose An Appropriate Online Broker

Choosing a CFD (contracts for difference) provider that is suitable for your trading is important for both trading as well as backtesting systems (if you do this).

And it is not only about reducing trading costs.

A suitable CFD broker allows you to:

1. Trade the way you want to trade.

For example, if need to place your orders to enter CFDs in the evenings when the market is closed, or, if you want to enter a CFD with stop orders (stop entry orders), then you’ll need to check to see if the provider will allow these types of orders, and during after market hours.

2. Trade a sufficient number of CFDs long and short.

If your system requires a sufficient number of CFDs to produce a certain return, then check to see that their list of tradable CFDs are adequate. Otherwise, your backtest results will be not very accurate.

Trading with leverage and trading with opportunities to go long and short are one of t reasons why CFD trading online has increased recently.

Note that the 'shortable' list of providers may change evry so often and even more often in times of high market volatility.

3. Minimise the costs of trading.

The costs of trading include:

1. spread widening (if the CFD prices are not the same as the underlying share prices),

2. commission,

3. interest costs,

4. slippage,

5. other costs eg for live dynamic data or delayed data (if any).

Slippage may be influenced by the way the stop losses are handled and not just gapping in the underlying market overnight for example. Minimising expense means maximising profits. So look at all these factors in the cost, not just one in isolation.

4. Offer the type of CFDs you want: DMA or Market Made.

These are different types of contracts for difference, and differ in their rules and way these contracts are executed.

Market made means that the market maker (provider) is quoting you a market price that may differ slightly from the underlying product price and the rules of entry and exit may be specific to the provider.

DMA or direct market access means that an order in placed in the underlying market and your order will contribute to the volume traded.

There are other categories such as exchange traded CFDs in some countries also, which are provided by the exchange as a trading product.

5. The company's regulations

Take a note of the stability of the company and the rules and regulations that they are trading under.

If they are regulated in the country that they are from, then this is some indication that they have certain rules that they are supposed to abide by.

Do your own due diligence on the companies to check their credentials and regulations that they operate under.

A few extra notes:

Note that with all CFD providers:

1. Tradable CFDs, spreads, and margins may change from time to time without notice with the market maker.

2. The commissions offered by market makers may be negotiable, or may vary if you’re with an educational trading group. Also some providers offer reduced fees for a certain number or volume of trades done per month.

3. If you trade with guaranteed stops, note that they may not be available on every CFD that’s tradable. So if this is important to you, check with the broker.