In normal trading you trade using things you own. The difference with margin trading is that you are borrowing what you trade with from your broker. This increases the potential for things to go wrong. It is very simple to borrow more than you can afford to pay back, due to the fact you do not have to pay for it initially. It is important to be aware that if anything goes wrong you can end up owing a lot of money in a small period of time. This is the very reason why novie traders should not start margin trading. With other forms of stock trading you can only lose what you have. For example, you have $1,000 in shares and if everything goes wrong you only lose that $1,000. If you are involved in margin trading however, you can end up losing a lot more.

Guidelines When Starting Margin Trading:

• Find out as much as you can about how it works and understand the potential for losses.
• Learn and understand leverage. Leverage put simply is borrowing from your broker without holding the shares yourself. An example of when you would want to use leverage is if you were holding $1,000 in shares and you think you are going to be making a good profit on them, you know you could make more profit if you had more shares. By borrowing from your broker you can access this increased profit.
• Understand if the market is good you can indeed make more money by margin trading, however if the market does not go your way it will lead to your losses mounting up quickly. This is how you can end up owing a lot of money.
• It is important to know exactly what you are doing and not to be tempted by ifs and maybes when you are margin trading.

Contracts for Difference (CFDs) offer you the ability to deal in the price movements of a wide range of financial instruments, such as stocks, without actually owning the underlying asset. Like traditional share dealing, the scope is for speculators to profit from the price moving in their favour, but CFDs give you the potential to profit from both rising and falling markets. In Australia it is becoming increasingly popular for traders and investors to use CFDs as part of their investment strategy.

Benefits of CFDs:

The ability to profit from both rising and falling prices.

Leverage/gearing; putting up only a fraction of the full contract value.

Low commissions costs across a range of markets.

Online trading platforms allowing a single account to deal in a wide range of markets.

What is Margin Trading?

Margin trading is the most powerful feature of CFDs. Margin trdaing allows you to trade an entire portfolio, without tying up lots of capital. For example if you place a deposit of $10,000 in your account, you can trade up to $100,000 worth of shares. This represents a leverage factor of 10:1.

The popularity of CFDs in Australia has largely come down to the simplicity of the product itself. Contracts for Difference or CFDs are exactly like trading the sharemarket except you need a small amount of money upfront. While CFDs are a leveraged product, the amount of leverage a trader users is entirely up to them. This means any trader could make the product as safe or as risky as they choose.

1,000 new accounts a month during the Bull Market

At the peak of the bull market it was quite common for some of the large CFD brokers in Australia to be opening around 1000 new accounts every single month. Whilst this may sound impressive it does not take into account the number of people who are closing their account each month as well.

During 2008 stock markets around the world experienced the highest level of volatility that any seasoned investor had ever seen. Despite this extreme volatility many CFD brokers in Australia experienced the highest level of trading volumes and the highest number of account openings at any time in their history.

Trading activity has recently doubled

In fact a recent article in the Australian newspaper indicated that one CFD broker managed to double the level of trading activity in the last six months of 2008 and new account openings were up 65%.

Using CFDs to Hedge and reduce portfolio volatility

One of the reasons for the heightened interest in CFD trading in Australia is due to the fact that CFDs can actually be used as a hedging tool and enable investors to reduce their risk on their existing share portfolio. Further to this any trader knows that with increased volatility comes an increased amount of opportunity.

So as you can see the popularity of trading CFDs in Australia is huge. It has overtaken the other derivative products like options, warrants and futures and will remain one of the best products to trade moving forward.

Understand the Power of Leverage

Contracts for Difference (CFDs) are a leveraged product and leverage means that money can be made or lost very rapidly. The fact that a trader lost money using Contracts for Difference (CFDs) does not mean that CFDs suck. If you do not yet have the discipline to use stops on every trade and to manage your risk, then maybe you are not ready to trade CFDs.

CFD Brokers Deliberately Hit Your Stops

Some of the reasons traders give that CFDs suck, centre on the CFD Broker knowing where your stop losses sit and therefore deliberately target these stops. The trade then reverses rapidly and goes in the favoured direction. The trader makes a loss, even though they were correct. In reality the CFD brokers have better things to do than chase stop losses and I personally have had trades hit my stop loss and reverse as well as trades move to within one point of my stop loss before reversing. The answer is careful stop placement, making an allowance for the normal fluctuations of the underlying instrument. A CFD broker cannot push the market around, it is the sum total of all the traders that move the market. Sometines this will hit your stop no matter how carefully you place the stop.

Ripped Off By Requotes

Many new traders trading shares also reckon that CFDs suck because their market maker broker re-quotes them a higher entry price when buying the share. These re-quotes are delivered because there is insufficient volume at the level that the trader wishes to trade, or the market has moved rapidly from the current price. This is known as slippage and is accepted as normal when buying shares. Some of the shares are executed at the cheaper price, and some at a higher price providing an average price higher than where the order was placed. A market maker can only execute the whole order or none of it, partial fills are not possible, so a re-quote is provided at a price level that allows them to execute the whole order. Re-quotes are not about ripping traders off, but just reflect the underlying execution of the order.

Take Responsibility for Your Trades

It is wrong to blame CFDs as the cause of bad performance, it is always the trader. Just as blaming the market is futile, saying CFDs suck does not address the underlying cause of the problem. A trader must take responsibility for his or her results and with this belief system in place it is possible for the trader to change their outcomes. “If you think the rest of the world is driving you crazy, you will have to send the rest of the world to a psychiatrist for you to get better.”

Uncover the secrets to finding your best time frame

Using Multiple time frames when doing your charting analysis is going to be essential to your success as a Day Trader. Maximising your entry will stem from using a short, medium and long term chart to focus on the best entry on your time frame.

As an example you may trade a 15 minute chart, so use a daily chart, 4 hourly chart and then the 15 minute to time your entry. Your challenge initially is to find the 3 charting timeframes that consistently locate winning trades.

How big will your CFD wins be?

The next major component is determining how big your wins need to be compared to your losses and this is referred to as your risk:reward ratio. CFD Day Traders normally have similar size wins to losses and traders need to be careful if the average size of a loss is greater than their wins. In order to be profitable you will need to ensure your percentage win rate is well over 60%.

A good example of a high win percentage are the robots available on the Forex markets like Fap Tubo or Forex Megadroid who suggest 85%-95% win rates. Most high win percentage trading systems have large losses which can devastate the account when they occur.

What you need to concentrate on when Day Trading CFDs

A huge challenge for short term traders is overtrading. Many CFD Day Traders feel the need to be active even when opportunities do not line up offering the best risk:reward. By focusing your efforts on a risk reward ratio of 1.5 to 1 or even 2 to 1 you can build a brilliant edge in the markets that will definitely reward your efforts.

Overtrading is the fastest way to the poor house so avoid this detrimental activity at all costs.

The main objective of trading futures contracts is either; strictly for speculation, or for hedging against movements in a share portfolio. The futures market gives a trader the option to take advantage of bearish sentiment on stocks within your portfolio, while also keeping your current placement.

If you believe that the market or a particular sector is likely to decrease in worth over the approaching months but are prepared to ride out the economic downturn, you may wish to sell a futures contract which tightly aligns with your share portfolio. If you are accurate, the worth of your portfolio will decrease, but your loss will be countered by the profits you make in the sale from the futures contract.

Additionally if you are completely wrong and then the market rises, so too will the value of your portfolio and these gains will counteract the losses you suffered on the futures market. This is not a perfect trading plan as your portfolio might behave differently to the contract, but it will largely have the effect of preserving your capital.

On the other hand, futures can magnify a bullish sentiment on stocks that you already hold. If you bought a futures contract with the perspective that the market was on the rise, not only would your stock portfolio become more valuable, but also you would reap the benefits of a futures contract, that is accumulating value. This is a more risky position to be in as a move in the wrong direction will harm the worth of both your portfolio and your futures contract.

Futures contracts are leveraged positions, meaning that the face value of the contract is not what you actually pay up front. Normally, the cost of a contract is only a minor percentage from the underlying worth. For this reason, when you’re right, your gains are significantly greater in percentage terms because you’ve only outlaid a small amount of the capital to control more stock than you otherwise could have, if you had purchased the underlying share.

Contracts are settled in cash rather than in the shares that they represent, so at expiry, you will get the difference between the actual worth of the contract and the price you bought or sold, or you will need to pay the difference. Whilst most expert trading houses and hedgers will trade through the SFE, most retail traders will discover that Contracts For Difference (CFDs) are a far more accessible way to trade. CFDs are an fantastic way to speculate and hedge. The use of leverage can magnify profits, but of course also magnify losses.

Let’s break down CFDs for all those beginners present.

Let’s get one thing straight: CFDS aren’t shares.  Actually, CFDs have all the advantages of trading stocks, without the need of you actually needing to physically buy, own or sell the shares. CFDs are almost similar to a board game variation of trading real shares in the market. They mirror the overall performance of a share, or an index.

It’s all concerning the difference.

With CFDs, you are making a contract with a provider (like IG Markets or CommSec) about the opening and closing price of a share or index you’re considering. You are making a deal with the CFD provider to exchange the difference between the opening and closing prices of your share or index.

E.g. you think a company is going to crash. You can instruct your CFD provider to specify the price of the company’s shares (the start of the contract) and what level you believe the shares will fall to (the close of the contract).

If and when you hit your target, the CFD provider pays out cash relating to the difference between the starting share price, and when the contract is finished.

Generally participants typically keep CFDs for just a a few days or weeks. While CFDs are ideal for short-term trading, they’re not good for long-term trading, because every day you retain a position it costs money.

It’s actually not really a lot of money each day, but it’s money all the same. Whenever you buy or sell a share/index/tradable instrument, the usual expense is 10% of the price of the underlying shares.

It is good that CFDs are a great deal cheaper than trading real shares, as you are only trading on a margin. And there’s also the side benefit of receiving access to the company’s dividends released during the CFD’s life.

However there’s downside, as well. Take into account CFDs are contracts, meaning they are two-way. You receive money if the price goes the way you think it does, but if it does not you will have to pay the CFD service provider when you get out of the contract.

The “borrowing” procedure involved in CFDs also magnifies whichever profits and losses you carry out, so whilst you stand to make decent money, you could also lose a lot more than you decided to put down to start with.

Like anything in the financial game, CFDs have their advantages and disadvantages.