Advantages Of CFD Trading Online
Contract For Difference, or CFDs, are a trading product where you to trade movements in the stock prices, without having to physically own the underlying shares in the case of non DMA CFDs.
A reason why they differ from ordinary shares as a trading product, is that they can be traded with leverage, which in effect magnifies your trading results. Remember of course that leverage magnifies your trading results so if you have wins or losses, they are both magnified. Hence leverage must be used wisely.
Also, they present many more shorting opportunities than is possible with share trading, so you can profit in falling as well as rising markets.
In summary, the advantages of trading CFDs include:
This, as mentioned, magnifies your trading results. So if you have a profitable system that returns 30% without leverage, and has a 15% drawdown, then with leverage, the system would be expected to return a multiple of this number. As you can see, with leverage the profitability can increase, but your losses can be larger than your cash float because of the leverage,
Of course, you do not have to use the total leverage offered by the market maker. Remember that leverage is a magnifier of results, so the more leverage is used, the greater the risk and higher the chances of margin calls also.
Some providers provide CFD platforms with no available leverage and a commission rate that is difference to their CFDs with leverage.
Ability to go short on more stocks
The ability to go short with ease gives you more trading opportunities, and hence, assuming a profitable system, will allow you to profit in falling markets. With any particular CFD broker, not every CFD will necessarily be able to be shorted. Check with each broker that you’re considering their list of current shortable CFDs, if they this is available.
The specific CFDs on these lists may also change from time to time.
Ability to place stop loss orders
With most market makers, you’ll be able to place stop loss order that are automatically filled. This means that you’ll be able to do intraday exits, and have them performed automatically, rather than having to exit the next day if your stop is breached, or having the possibility of using emotion and discretion (for those trading mechanical systems) getting in the way.
It also means it is easier being in many positions at once, as this leg of the trade is automated. Though this is the case, you should always check to see that the trades you’re supposed to be exited from, is actually exited.
Lower transaction costs
In the case of many CFD providers, the commission costs are relatively low compared to shares. However remember that there are differences apart from commissions. With CFDs there is a financing cost of long positions with CFDs. So you need to workout for an average trade with an average trade length, that the lower commissions outweight the financing costs. With most CFD brokers, when you are long a position, and the underlying share goes ex-dividend, then you will be credited the dividend. If you are short the position, then you will be debited the dividend.
Read more about the costs of CFD trading.
Ability to place orders out of hours (for some providers)
With some CFD providers, you can place your orders in the evenings when the market is closed, such as orders to enter a new position, or to adjust a stop loss. This is convenient for those who are working or are otherwise busy during the day, and can’t get to the computer screen during market hours.
The order types available do vary between providers so check with each one their various rules and order types to see if they can perform the types of orders you require. This means that you must be clear as to the requirements of your trading system.
All trading involves a high risk of financial loss, and the information on this site is for general information purposes only and is not financial advice in any form. See your own financial advice before taking any action.
All forms of trading involves risk of financial loss. Trading with leverage can lead to losses greater than your cash float.
Also note that CFD trading is not legally permitted in some countries.
Note that this site may have paid advertising or commissions generated for referrals to products and services, and CFD providers made from this site.
If there are any claims as to the results of products or services, that these results may not be typical and are not guaranteed.
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