CFD Trading 2020 – Tutorial dan Broker

What are CFDs?

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 to speculate on price movements, without owning the actual asset.

The performance of CFDs reflects the underlying assets. Profits and losses are established when the value of the underlying asset changes following the opening price position.

When trading CFDs with a broker, you do not own the assets being traded. You are speculating on price movements, up or down.

Examples of CFDs

Let’s use an example. Let’s say you select a stock with an asking price of $25 and you open a CFD for the value of 100 shares.

If buying shares traditionally, the cost is $2,500. There may also be commissions or trading costs.

However, CFD brokers often require only a 5% margin. This will allow you to enter the same trade but with only $125. (The actual level of leverage or margin will vary). This makes it an attractive hunting ground for intraday traders. The risk-to-reward ratio increases, making short-term trading more viable.

When you enter your CFD, the position will show a loss equal to the size of the spread. This means that if the spread from your broker is 5 cents, you need the stock to appreciate at least 5 cents to break even.

 

 

CFDs vs Stocks

Using the example above: Suppose the price of the underlying stock continues to rise and reaches an offer price of $26.00

If you own the stock, your holdings are now worth $2600. Nice profit – ignoring commissions or trading costs the trader realizes $100.

However, with the underlying stock at $ 26.00, the CFD will show the same profit of $ 100 – but it requires less means to open, only $ 125. Therefore in terms of percentage, the CFD returns a larger profit. If the market moves the other way, the loss compared to our investment will be greater – both risk and reward increase.

Of course there are other benefits to owning an asset rather than speculating on price. We also ignore commissions and spreads for clarity. But the above illustrates the relative differences in both methods of investing.

Application

While you are day trading, you may not hold any CFD positions overnight. On the other hand, you will probably place a high volume of CFD trades in one day. To maximize your returns, you want to focus on liquid volatile markets. CFD trading in oil, bitcoin, and forex are all popular options, for example.

CFD benefits

You may have already gotten some of the above advantages from CFDs, but let’s break it down and add a few more.

• Leverage – CFD leverage is much higher than traditional trading. You can get a margin requirement of at least 2%. The rate usually depends on the underlying asset. Volatile stocks or cryptocurrencies, for example, can reach up to 20%. Although low margin rates will allow you to take large positions with less capital, losses will also hit you harder.
• Accessibility – The best CFD brokers will allow you to trade on all major markets. With so many markets that means CFD trading hours effectively run 24 hours a day. You just need to check your broker’s trading hours first.
• Cost – CFD trading systems bear minimal costs. You will find many brokers charge little or zero fees for entering and exiting trades. Instead, they make their money when you have to pay for the spread. The size of the spread depends on the volatility of the underlying asset. Note it is usually a fixed spread.
• Shorter rules – Some markets enforce rules that prevent you from misleading at certain times. They can demand higher margin requirements for shortages as opposed to long periods of time. The CFD market, however, generally has no such rules, as you don’t actually own the underlying asset. This means no borrowing or shortage costs.
• Lack of day trading requirements – Some markets require large amounts of capital to start trading. This limits you to how many trades you can make, and in turn how much profit. However, online CFD traders can create accounts with as little as $1,000 to $5,000.
• Variety – Whatever interests you, you will likely find a CFD vehicle. You can start trading FX CFDs, as well as using treasury, commodity, crypto, and index CFDs.

 

 

CFD risk

Despite its many benefits, there are some disadvantages to CFDs that you should be aware of.

• Regulation – The CFD industry is not comprehensively regulated. This means that it is increasingly important that you choose the right broker. You need to make sure they are trustworthy and in a strong financial position. For further guidance, see our brokers page.
• Trading on margin – While margin increases profit potential, it also increases risk. It is very easy to reduce the exposure you have when using margin. A position worth $2000 using 5% margin means exposure to a contract worth $40,000. You effectively borrowed $38k from your broker. If the market moves in your direction, the loss can exceed the deposit. Awareness of the amount of exposure is very important.

How to Start Trading CFDs

One of the selling points of trading with CFDs is how easy it is to proceed. You need to follow just five simple steps.

1. Select Market

There are thousands of individual markets to choose from, including currencies, commodities, interest rates and bonds. Try and choose a market 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 easy.

2. Buy Or Sell

If you buy you go long. If you sell you go short. Bring a trading ticket on your platform and you will be able to see the current price. The first price will be the offer (sale price). The second price will be offered (purchase price).

The price of your CFD is based on the price of the underlying instrument. If you have reason to believe the market will rise, you should buy. If you believe it will go down you should sell.

3. Trade Size

You now need to select the size of the CFD you want to trade. With CFDs, you control the size of your investment. So even though the price of the underlying asset varies, you decide how much to invest. Brokers however, have a minimum margin requirement – ​​or more simply, the minimum amount required to open a trade. This will change asset by asset. It will always be clearly explained, such as the total value (or your exposure) of the trade.

Mobile assets like cryptocurrencies usually have higher margin requirements. So a position with a Bitcoin exposure worth $2000, might require a margin of $1000 for example. A well-traded stock, however, only requires a 5% margin. So position $ 2000 on Facebook, only need $ 100 account funds.

4. Add Stops & Limits

This will help you take profits and limit any losses. Most CFD strategies for beginners and experienced traders will employ the use of stop losses and/or limit orders. They are allied with your risk management strategy. Once you have determined your risk tolerance, you can place a stop loss to automatically close the trade when the market reaches a predetermined level. This will help you minimize losses and keep your account in the black – leaving you to fight another day on the next trade.

 

 

A limit order will instruct your platform to close a trade at a price better than the current market level. If you choose a trading bot, they will use pre-programmed instructions like this to enter and exit trades in line with your trading plan. This is perfect for closing trades near resistance levels, without having to constantly monitor all positions.

5. Monitor & Close

Once you place your trade and limit or stop loss, your profit will change 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 apps.

If your stop loss or limit is not activated, you can close it yourself. Just select ‘close position’ from the position window. You will be able to see your profit or loss immediately in your account balance.

Strategy

Choosing the right market is a challenge, but without an effective strategy, your profits will be few and far between. You need to find a strategy that compliments your trading style. This means it plays to your strengths, such as technical analysis. It also means it has to fit your risk tolerance and financial situation.

Below two popular and successful CFD trading strategies and tips have been outlined.

Breakout Strategy

This simply requires you to identify a key price level for a particular security. When the price hits your key level, you buy or sell, depending on the trend. The main thing to remember with breakout trading is to avoid any trades when the market is not providing a clear signal.

If you cannot tell which direction the overall trend is moving in then it will be missed. This is where detailed technical analysis can help. Use charts to identify patterns that will give you the best chance of telling you where the trend is heading.

Contrarian Strategy

It’s all about timing. Your plan rests on the knowledge that trends don’t last forever. If the stock price is on the decline then you have identified a point where you believe it is near the end of the trend. Then you enter a buy position expecting the trend to turn in the other direction.

You can follow the same procedure if the price is increasing. You can short a rising stock when you think a sudden change is imminent. Both Wave Theory and various analytical tools will help you determine when such changes will occur.

For more guidance, see our strategy page.

CFD Trading Tips

If you want to really increase your profits, consider these tips from top traders. Learn from their mistakes and hopefully, you won’t experience the same costly inconvenience.

Control your Leverage

Leverage is your greatest asset when you have made the right trades. The temptation to increase your position size when you win is hard to resist. However, there are always losses on the horizon.

You don’t want to be the trader who turns a small account into a large account, only to return at square one. So, you have to be smart. No one wants margin calls and the stress that comes with big losses. As Paul Tudor Jones said, ‘Don’t focus on making money, focus on protecting what you own.’

 

 

Having said that, start small to begin with. Make sure your exposure is relatively low compared to your capital. It is a good idea not to leverage more than 3 times your account size, especially in the beginning.

As your capital grows and you prevent growth in your strategy, you can slowly increase your leverage.

Keep a Journal

A bit like a diary, but changing the description to break you down for entry and exit points, price, position size and so on. This will be your bible when looking back and identifying mistakes. CFD trading journals are often overlooked, but their use can prove invaluable.

Hindsight is a powerful force, don’t throw it away. You will be able to identify patterns, reflect on your trading emotions and align strategies. A comprehensive trade journal should include the following:

• This instrument
• The time you enter and exit trades
• Commercial, technical, news-based reasons, etc
• Either profit or loss
• An overview of your trading performance (including whether you are following your trading rules)
• What you learn from trading

It may sound time consuming but it will allow you to constantly review and improve. You’ll make smarter and faster decisions, while those who haven’t are scratching their heads wondering what they’ve been doing for the past few weeks.

Use Stop

Used correctly you will be able to minimize your losses, keeping you in the game. Every trade you enter requires a clear CFD stop. This is because emotions will inevitably run high and the temptation to hang on a little longer can be hard to resist. As William O’Neil rightly states, ‘letting losses slip is the most serious mistake most investors make.’

Therefore, set a CFD stop outside market hours and continue religiously. This will also help you anticipate your maximum loss. You can then use the time you will be fighting the internal battle to research and prepare for the next trade.

Demo Account

When you’ve done your research and you’ve finally got the capital to start trading, it’s hard to resist jumping in head first. However, a day trader will test his strategy with a demo account first.

Many brokers offer this practice account. They are funded with simulated money, making them an ideal place to make mistakes before your real money is on the line. Not only can you test your strategy and get to know the CFD trading market, but they are also an effective way to test your broker’s trading platform. You can make sure it has all the charting and analysis tools your trading plan needs.

When you are comfortable and seeing consistent results on your demo account, then upgrade to a live account.

Education

No one likes to hear it, but school isn’t over. The best traders never stop learning. You need to keep up with market developments, while practicing and perfecting new CFD trading strategies. Learning from successful traders will also help. To do all this, you need to use a variety of different resources. To name a few:

• Blogs
• Course
• Forum
• Videos
• PDF
• Books & Ebooks
• Podcasts
• Online guide

Regional Differences

Tax

Although you can trade CFDs worldwide, where you are based and the market you are trading in can throw up an expensive banner in the works. CFD trading in the United States will differ from that in the UK, Australia, India, South Africa, and Singapore.

This is mainly because of taxes. Different countries view CFDs differently. Some consider them a form of gambling activity and therefore exempt from taxation. Some countries treat them as taxable like any other form of income.

The tax implications in the UK, for example, would see CFD trading fall under capital gains tax requirements. Even if you get an annual exemption of £10,100, any gain above that will be taxed. This means you need to keep detailed transaction records so you can make accurate calculations at the end of the tax year.

So, before you start trading, find out whether you will pay personal income tax, business tax, capital gains tax, or if you are lucky, no tax. Once you know what type of tax liability you will face you can factor it into your money management strategy.

For more detailed guidance, see our tax page.

Final Word

Day trading CFDs can be relatively less risky than other instruments. Having said that, it will still be challenging to formulate and implement a consistent strategy. If you want to become a successful CFD trader you need to use the educational resources above and follow the tips mentioned. As successful trader Alex Hahn says, If you master your thoughts and emotions, nothing can stop you. ‘ So the ball is in your half of the court now, go and make it gold.