Risk Diversification for Retail CFD Traders

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Currency & CFD Trading

Most frequently asked questions

Spread: When trading CFDs, you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favor before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.

Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.

We set a price for a contract based on the underlying market, which you can buy or sell.

With each market, you are given a ‘buy’ and ‘sell’ price either side of the underlying market price. You can trade on the market to go up (known as ‘buying’ or ‘going long’), or you can trade on it to go down (known as ‘selling’ or ‘going short’).

Once you open your trade, you’ll receive a confirmation message to show that it has been accepted. Trades are occasionally rejected, but the vast majority go through without any problems. Check the details on your confirmation message carefully to make sure the trade is as you intended.

Your open trade will now appear in the ‘open positions’ pane in our trading platform. All the time, your position is open, you’ll be able to see your profit or loss by checking the profit/loss column.

When you decide to close your position and collect your profits, to do this, you sell the same number of contracts as you bought initially.

The simplest way of doing this is to bring up a ‘close position’ screen. When you click on ‘sell’, you’ll receive another confirmation to let you know that you’ve sold that number of contracts.

Unlike some other forms of trading, when it comes to CFDs traders using the Fortrade platform, traders can hedge their trades, which can be beneficial when it comes to limiting potential losses.

For example, let’s say that I currently have an open position on Dollar/Yen – I ‘went long’ buying the Dollar in the expectation that USD would strengthen against the Japanese currency. However, I’m now having second thoughts – not enough to make me want to close my trade, but sufficient doubt to make me slightly uncertain that my hoped-for currency strengthening will occur.

In other forms of trading, I would have two choices; close the trade now or keep the deal open and cope with the uncertainty. However, with a CFD, I can simultaneously open another Dollar/Yen position in which I short the Dollar – going the opposite way to my first trade, which is still open. Traders should keep in mind that CFDs can only be hedged using the Fortrade platform.

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If the currency pair subsequently moves the other way to my original trade – with the Dollar falling against the Yen – I’ll still be able to salvage something from the situation, because my hedge will then take effect.

If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.

For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end, and the value of your physical shares starts to rise again.

Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.


CFD Trade Example

So, how exactly does one trade a CFD? Let’s take a look at an example of a CFD trade using the popularly traded ‘Germany 30’ index as an example;

In the following theoretical example, ‘Germany 30’ is currently trading at a level of 9610.5/9611.5, giving me the option of selling the German index at the 9610.5 level or buying at 9611.5. I decide to buy £5 of the ‘Germany 30’ at that 9611.5 level, and my nominal risk in this instance would be worked out as follows;

(Level I’m buying at x the amount I’m buying)

So, in this case, the nominal risk would be;

9611.5 x 5 = 48057.5

£48,057.50 is the maximum amount of money I would stand to lose if the ‘Germany 30’ dropped from its current 9611.5 level to zero.


CFDs and Leverage

As a form of trading involving leverage, instead of having to put down the cost of the trade-in its entirety (at 9611.5 x 5 that would cost £48,057.50, the same as my nominal risk) I only need to put in a small percentage of the overall value to initiate the trade. We work this out as a percentage of the nominal risk – if the margin is 1%, then 48,057.50/100 = 480.575. Therefore, rounding upwards by a penny, £480.58 is the amount needed to initiate the trade.

If, however, I had decided to sell £5 of ‘Germany 30’ instead of buying it, the price of my trade would be as follows;

9610.5 x 5 = £48,052.5

The amount I would need to put into my trade would, therefore, be 1% of that, meaning £480.53

Traders are advised to remember that increasing leverage increases risk.

CFD Trading Results

Going back to the scenario where I bought £5 rather than sold, if the ‘Germany 30’ subsequently moves up to a level of 9613.5/9614.5, and I decided that this would be a good point for me to exit the trade, I would work out the profit on my trade as follows; the amount I bought x the number of points that the trade has moved in my favor.

In this case, my profit would, therefore, be 5 x 2, meaning that I would make a profit of £10 on the trade.

Alternatively, had I sold £5 of the ‘Germany 30’ at the 9610.5 level and then closed the trade at that 9613.5/9614.5 level, my loss would be 5 x 4, seeing as the price of my closing trade would be four points higher than when I opened it. In this case, my loss on the trade would be £20.

If however, the ‘Germany 30’ fell from 9610.5/9611.5 to 9608.5/9609.5 – had I bought £5 of the ‘Germany 30’ at the original level my loss would be calculated as follows; the amount I bought x the number of points that the trade has moved against me.

In this instance, my loss would be 5 x 3, meaning that I would make a loss of £15. On the other hand, if I had sold £5 of ‘Germany 30’ at the original level, then my profit would be 5 x 1, giving me a profit of £5.

Forex swap is the overnight charge/credit amount for an open position.
The amount reflects the interest rate difference between the central banks (based on market rates and spreads) of the two assets involved.

Swaps are credited or debited once for each day of the week, with the exception of Wednesday, on which they are credited or debited 3 times their regular amount.

Swap charges are released on a weekly basis by the financial institutes which Fortrade works with, and are calculated and determined according to various risk management criteria and market conditions.

The swap premium is calculated in the following manner:

Pip Value (Depending On Trade Size) * swap rate in Pips * Number of Nights = Swap charge/credit

Forex Example:
You open a short position (Sell) on EUR/USD for 1 lot with an account based in USD:

1 Lot = 100,000
1 Pip Value = 10 USD
Swap Rate = -3.2839 Points (equivalent to 0.32839 Pips)
Number of Nights = 1
Swap Premium: 10 * 0.32839 * 1 = 3.2839 USD

CFDs Example:
You open a long position (Buy) on Crude oil for 1 lot (1,000 barrels) with an account based in USD:

Swap Rate = -0.3807
1 Cent Value = 10 USD
Number of Nights = 1
Swap Premium: 10 * -0.3807 * 1 = -3.807 USD

A trader has an open SHORT or SELL position of 1,000 Crude Oil Barrels.

The current contract closing quote is 45.50 (Bid)/45.54 (Ask), and the new contract quote is 46.50 (Bid)/46.54 (Ask).

The difference is +1 USD, i.e., the new contract is HIGHER than the old contract.

To rollover the open short position, Fortrade automatically closes the old contract at the ask price of (since the client has a SELL position, it will be closed in the ask price, which is 45.54), and simultaneously re-opens at the new contract bid price of 46.50.

In this example, the client is credited with the sum of 960 USD, reflecting the price difference between the two contracts. It means that the customer’s charge is equivalent to the spread of the Bid and the Ask (i.e., the new contract will be opened at the Bid price, which is 46.5).

The calculation is: (46.5 – 45.54) * 1,000 = 960 USD

(Old Contract Closing Ask Price – New Contract Opening Bid) * Amount = Rollover Charge/Credit)

If you do not wish to incur rollover adjustment costs, simply close any open positions before the scheduled rollover date. These dates may be found on the Rollover Rates page of our website. Clients are also advised of upcoming rollovers via notifications on the Fortrader trading platform.

Rollover rates are provided and updated directly to our website. To view the most recent rollovers and an annual schedule of dates for rollovers, please click here.

Please note, rollover charges/credits are also reflected inside the Swap column of our financial instruments’ Trading Conditions (in addition to an already existing Swap charges).

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Be Aware: You can lose all,
but not more than the balance of your Trading Account. These products may not be suitable for all clients therefore ensure you understand the risks and seek
independent advice. This material does not constitute an offer of, or solicitation for, a transaction in any financial instrument. Fortrade accepts no responsibility
for any use that may be made of the information and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of
this information, consequently any person acting on it does so entirely at their own risk.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country
or jurisdiction where such distribution or use would be contrary to local law or regulation.

When performing transactions in the OTC Forex market, the possibility of making a profit is inextricably linked with the risk of losses. Conducting transactions
can lead to the loss of part or all of the initial investment. Before commencing operations, make sure you understand the risks involved and have sufficient skills to invest.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country
or jurisdiction where such distribution or use would be contrary to local law or regulation.

CFDs and margin FX are leveraged products that carry a high level of risk to your capital. You should only trade with money you can afford to lose. Be Aware: You can lose all, but not more than the balance of your Trading Account. You do not own, or have any rights to, the underlying assets. Past performance is no guarantee of future performance. This information is intended to be general in nature and is not financial product advice. Any advice contained on this website or provided to you by Fort Securities Australia Pty Ltd is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. We encourage you to obtain independent financial advice and consider our Financial Services Guide (FSG) and Product Disclosure Statement (PDS) before deciding to enter into or obtain any financial products issued by us.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Be Aware: You can lose all, but not more than the balance of your Trading Account. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice. This material does not constitute an offer of, or solicitation for, a transaction in any financial instrument. Fortrade accepts no responsibility for any use that may be made of the information and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information, consequently any person acting on it does so entirely at their own risk.

CFD trading is only available in provinces in which Fortrade Canada Limited is authorised, which include British Columbia and Ontario ONLY.

Risks of CFD trading

As a new trader, it’s important to understand the risks associated with CFD trading before you start trading with a live account.

CFDs are a leveraged product

Leverage gives you exposure to the markets by depositing just a percentage of the full value of the trade you wish to place. This means that while you could make a potential profit if the market moves in your favour, you could just as easily make significant losses if the trade moves against you and you don’t have adequate risk management in place.

​For instance, if you place a CFD trade worth £1,000 and the margin rate for the applicable tier is 5%, you only need to fund 5% of the total value of the position, known as position margin. In this case, you only need to allocate £50 to open the trade. If, however, the price of the product moves against you by 10%, you lose £100 – double your initial stake in the CFD trade. This is because your exposure to the market (or your risk) is the same as if you had purchased £1,000 worth of physical shares. This means that any move in the market will have a greater effect on your capital than if you had purchased the same value of shares. However, retail client accounts have negative balance protection, so your losses will be limited to the value of the funds in your account.

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Risk of account close-out

Market volatility and rapid changes in price, which may arise outside normal business hours if you are trading international markets, can cause the balance of your account to change quickly. If you don’t have sufficient funds in your account to cover these situations, there is a risk that your positions will be automatically closed by the platform if the balance of your account falls below the close-out level (as shown on the platform).

You should continuously monitor your account and deposit additional funds or close your positions (or a portion of your positions) so that the funds in your account cover the total margin requirement at all times.​

The information icon within the main account bar at the top of the platform will detail all your account information, including the close-out percentage level.​

Account close-out example:
If the current close-out percentage level is 50% and you have four trades open that each require £500 worth of position margin, your total position margin requirement will be £2,000. If your account revaluation amount then drops to less than 50% of the total margin requirement, in this case £1,000, some or all of the trades constituting this position may be closed out, potentially at a loss to you.

The account revaluation amount is the sum of your cash and any net unrealised profit or loss (as applicable), where net unrealised profit or loss is calculated using the level 1 mid-price.

Market volatility and gapping

Financial markets may fluctuate rapidly and the prices of our instruments will reflect this. Gapping is a risk that arises as a result of market volatility. Gapping occurs when the prices of our instruments suddenly shift from one level to another, without passing through the level in between. There may not always be an opportunity for you to place an order or for the platform to execute an order between the two price levels. One of the effects of this may be that stop-loss orders are executed at unfavourable prices, either higher or lower than you may have anticipated, depending on the direction of your trade. You are able to limit the risk and impact of market volatility by applying an order boundary or guaranteed stop-loss order.

Holding costs

Depending on the positions you hold, and how long you hold them for, you may incur holding costs. These holding costs are applied to your account on a daily basis if you hold positions on certain instruments overnight past 5pm New York time. In some cases, particularly if you hold positions for a long time, the sum of these holding costs may exceed the amount of any profits, or they could significantly increase losses. It is important that you have sufficient funds in your account to cover your holding costs.

CFD trading carries a high level of risk to your capital compared to other kinds of investments, and prices could move rapidly against you. Therefore, CFD trading may not be appropriate for everyone and we recommend that you understand the risks, and seek independent professional advice if necessary, before deciding whether to start CFD trading.

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CFD Trading 2020 – Tutorial and Brokers

Day trading with CFDs is a popular strategy. The leverage and costs of CFD trading make it a viable option for active traders and intraday trades. This page provides an introductory guide, plus tips and strategy for using CFDs. We also list the best CFD brokers in 2020.

Top 3 CFD Brokers in Russia

What Is A CFD?

A CFD is a contract between two parties. They agree to pay the difference between the opening price and closing price of a particular market or asset. It is therefore a way to speculate on price movement, without owning the actual asset.

The performance of the CFD reflects the underlying asset. Profit and loss are established when that underlying asset value shifts in relation to the position of the opening price.

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

CFD Example

Lets use an example. Say you select a stock with an ask price of $25 and you open a CFD to the value of 100 shares.

If buying shares the traditional way, the cost would be $2,500. There might also be commission or trading costs.

However, a CFD broker will often require just a 5% margin. This will allow you to enter the same trade but with only $125. (Actual levels of leverage or margin will vary). This makes it an attractive hunting ground for the intraday trader. The risk and reward ratio is increased, making short term trades more viable.

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

CFD vs Stock

Using the above example: Let’s say the price of the underlying stock continues to increase and reaches a bid price of $26.00

If you owned the stock, your holding is now worth $2600. A nice profit – ignoring commission or trading costs the trader realised $100.

However, with the underlying stock at $26.00, the CFD would show the same $100 profit – but it required way less to open, just $125. So in terms of percentage, the CFD returned much greater profits. Had the market moved the other way, losses relative to our investment would have been larger too – both risk and reward are increased.

There are of course other benefits to owning an asset rather than speculating on the price. We also ignored commissions and spreads for clarity. But the above does illustrate the relative differences in the two methods of investing.

Application

As you are day trading you probably won’t hold any CFD positions overnight. Instead, you’ll likely place a high number of CFD trades in a single day. To maximise your returns you’ll want to concentrate on liquid volatile markets. CFD trading with oil, bitcoin, and forex are all popular options, for example.

CFD Benefits

You may have already gleaned a couple of advantages above from CFDs, but let’s break them down and add a few more.

  • Leverage – CFD leverage is much higher than traditional trading. You can get margin requirements as little as 2%. The rate usually depends on the underlying asset. Shares or volatile cryptocurrencies, for example, can reach up to 20%. Whilst low margin rates will allow you to take big positions with less capital, losses will also hit you harder.
  • Accessibility – The best CFD brokers will allow you to trade in all of the major markets. With so many markets that means CFD trading hours effectively run 24 hours a day. You’ll just need to check your brokers trading hours first.
  • Cost – CFD trading systems incur minimal costs. You will find many brokers charge little or zero fees to enter and exit trades. Instead, they make their money when you have to pay the spread. The size of the spread will depend on the volatility of the underlying asset. Note it is usually a fixed spread.
  • Less shorting rules – Some markets enforce rules that prevent you shorting at certain times. They can demand greater margin requirements for shorting as opposed to being long. The CFD market, however, generally doesn’t have such rules, as you’re not actually owning the underlying asset. This means no borrowing or shorting costs.
  • Less day trading requirements – Some markets require significant capital to start trading. This limits you to how many trades you can make, and in turn how much profit. An online CFD trader, however, can set up an account with as little as $1,000 to $5,000.
  • Diversity – Whatever peaks your interest, you’ll probably find a CFD vehicle. You can start CFD FX trading, as well as utilising treasury, commodities, cryptocurrencies, and index CFDs.

CFD Risks

Despite the numerous benefits, there remain a couple of downsides to CFDs you should be aware of.

  • Regulation – The CFD industry is not thoroughly regulated. This means it’s increasingly important you select the right broker. You need to make sure they are credible and in a strong financial position. For more guidance, see our brokers page.
  • Trading on margin – While margin increases profit potential, it also increases risk. It is very easy to lose sight of the total exposure you have when using margin. $2000 worth of open positions using 5% margins mean exposure to $40,000 worth of contracts. You are effectively borrowing $38k from your broker. If markets move against you, losses can exceed deposits. An awareness of the total exposure is very important.

How To Start Trading CFDs

One of the selling points of trading with CFDs is how straightforward it is to get going. You’ll need to follow just five simple steps.

1. Choose A Market

There are thousands of individual markets to choose from, including currencies, commodities, plus interest rates and bonds. Try and opt for a market you have a good understanding of. This will help you react to market developments. Most online platforms and apps have a search function that makes this process quick and hassle-free.

2. Buy Or Sell

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

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

3. Trade Size

You now need to select the size of CFDs you want to trade. With a CFD, you control the size of your investment. So although the price of the underlying asset will vary, you decide how much to invest. Brokers will however, have minimum margin requirements – or more simply, a minimum amount that is required in order for the trade to be opened. This will vary asset by asset. It will always be made clear however, as will the total value (or your exposure) of the trade.

Volatile assets such as cryptocurrency normally have higher margin requirements. So a position with exposure to $2000 worth of Bitcoin, might need margin of $1000 for example. A well traded stock however, may only need 5% margin. So a $2000 position on Facebook, may only require $100 of account funds.

4. Add Stops & Limits

This will help you secure 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 tie in with your risk management strategy. Once you have defined your risk tolerance you can place a stop loss to automatically close a trade once the market hits a pre-determined level. This will help you minimise losses and keep your accounts in the black – leaving you to fight another day on subsequent trades.

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

5. Monitor & Close

Once you’ve placed your trade and stop or loss limits, your profits will shift along with the market price. You can view 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 order hasn’t been activated you can close it yourself. Simply select ‘close position’ from the positions window. You will be able to see your profit or loss almost instantly in your account balance.

Strategies

Choosing the right market is one hurdle, but without an effective strategy, your profits will be few and far between. You need to find a strategy that compliments your trading style. That means it plays to your strengths, such as technical analysis. It also means it needs to fit in with 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 identifying a key price level for a given security. When the price hits your key level, you buy or sell, dependent on the trend. The main thing to remember with breakout trading is to avoid any trades when the market isn’t providing clear signals.

If you can’t quite tell which direction the overall trend is moving in then give it a miss. 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

This is all about timing. Your plan rests on the knowledge that trends don’t last forever. If a stock’s price has been on the decline then you identify a point where you believe it’s near the end of the trend. Then you enter a buy position in anticipation of the trend turning in the other direction.

You can follow exactly the same procedure if the price is rising. You can short a stock that has been increasing in price when you think a sharp change is imminent. Both Wave Theory and a range of analytical tools will help you ascertain when those shifts are going to take place.

For further guidance, see our strategies page.

CFD Trading Tips

If you’re looking to really bolster your profits consider these tips from top traders. Learn from their mistakes and hopefully, you won’t run into the same expensive pitfalls.

Control Your Leverage

Leverage is your greatest asset when you’ve made the right trade. The temptation to increase your position sizes when you’re winning is difficult to resist. However, there is always a loss on the horizon.

You don’t want to be the trader that turns a small account into a huge account, only to end up back at square one. So, you need to be smart. Nobody wants the margin calls and the stress that come with big losses. As Paul Tudor Jones famously said, ‘Don’t focus on making money, focus on protecting what you have.’

Having said that, start small to begin with. Keep your exposure relatively low in comparison to your capital. It’s a good idea not to leverage more than 3 times your account size, particularly at the beginning.

As your capital grows and you iron out creases in your strategy, you can slowly increase your leverage.

Keep A Journal

A bit like a diary, but swap out descriptions of your crush for entry and exit points, price, position size and so on. This will be your bible when it comes to looking back and identifying mistakes. CFD trading journals are often overlooked, but their use can prove invaluable.

Hindsight is a powerful force, don’t waste it. You’ll be able to identify patterns, reflect on your trading emotions and streamline strategies. A thorough trading journal should include the following:

  • The instrument
  • The time you entered and exited the trade
  • Reasons for the trade, technical, news-based, etc.
  • Whether it was a profit or loss
  • A review of your trade performance (including whether you followed your trading rules)
  • What you learnt from the trade

It may sound time-consuming but it will allow you to constantly review and improve. You’ll make smarter and faster decisions, whilst those without are still scratching their heads wondering what they’ve been doing wrong for the last few weeks.

Use Stops

Used correctly you’ll be able to minimise your losses, keeping you in the game. Each trade you enter needs a crystal clear CFD stop. This is because emotions will inevitably run high and the temptation to hold on that little bit longer can be hard to resist. As William O’Neil correctly pointed out, ‘letting losses run is the most serious mistake made by most investors.’

So, define a CFD stop outside of market hours and stick to it religiously. This will also help you anticipate your maximum possible loss. You can then use the time you would be fighting an internal battle to research and prepare for the next trade.

Demo Accounts

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

Plenty of brokers offer these practice accounts. They’re funded with simulated money, making them the ideal place to make mistakes before your real money is on the line. Not only can you test your strategy and get familiar with CFD trading markets, but they’re also an effective way to try your broker’s trading platform. You can make sure it has all the charting and analysis tools your trading plan requires.

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

Education

Nobody likes to hear it, but school isn’t over. The best traders will never stop learning. You need to keep abreast of market developments, whilst practising and perfecting new CFD trading strategies. Learning from successful traders will also help. To do all of this you’ll need to utilise a range of different resources. To name just a few:

Regional Differences

Taxes

Although you can trade CFDs all over the world, where you’re based and the market you’re trading in can throw an expensive spanner in the works. CFD trading in the USA will be different to 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 free from tax. Some countries consider them taxable just like any other form of income.

The tax implications in the UK, for example, will see CFD trading fall under the capital gains tax requirements. Although you get a £10,100 annual exemption, any profits that exceed that will be taxed. This means you should keep a detailed record of transactions so you can make accurate calculations at the end of the tax year.

So, before you start trading, find out whether you’ll pay personal income tax, business tax, capital gains tax, or if you’re lucky, no tax. Once you know what type of tax obligation you will face you can incorporate that into your money management strategy.

For more detailed guidance, see our taxes page.

Final Word

Day trading CFDs can be comparatively less risky than other instruments. Having said that, it will still be challenging to craft and implement a consistently profitable strategy. If you want to be a successful CFD trader you will need to utilise the educational resources above and follow the tips mentioned. As successful trader Alex Hahn pointed out, If you master your thinking and your emotions, nothing can stop you.’ So, the ball is in your half of the court now, go and turn it into gold.

The benefits of diversification in your trading portfolio

Updated: 04 March 2020

Richard has more than two decades of experience in the financial markets and has had his writing appear on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine

The concept of diversifying a trading portfolio is often linked to long-term trading and investments. However, this method also holds many benefits for those pursuing short-term forex or CFD trading. The changes caused by economic and political changes and events largely influence all markets, which makes diversification advantageous to long-term investors and short-term traders alike.

The concept of diversifying a trading portfolio is often linked to long-term trading and investments. However, this method also holds many benefits for those pursuing short-term forex or CFD trading. The changes caused by economic and political changes and events largely influence all markets, which makes diversification advantageous to long-term investors and short-term traders alike.

The classic concept of not putting all your eggs in one basket is used throughout all trading markets and portfolio strategies. This method of trading a variety of markets protects traders from the risks of one market crashing or turning against you. This provides more opportunities for successful trades with a broader range of trading possibilities.

Accessible markets and asset classes

Each market experiences news releases, changes and events differently. Some may see one event as positive, while other markets are negatively affected by that same event. Analyzing these varying factors and how markets will be influenced by them allows you to make strategic trades, indicating favorable long and short positions. The first asset class or market consists of commodities such as resources, grains and metals. The second is the stock market, including stocks and indices. The third is treasuries, which is essentially the bond market of the government. The last market is the foreign exchange market, or forex.

These markets can be divided into the following four categories:

  • Interest sensitive: This group is affected in the adverse direction of interest rate movement. If the interest rates go up, these areas will go down; if the interest rates go down, they will go up. These areas include financial stocks, utility stocks, treasury bonds and telecommunication stocks.
  • Defensives: These areas use risks to attract potential capital. These include risks in stocks such as health care, currencies like the US dollar or Japanese Yen, and metals like gold and silver.
  • Economically sensitive: This group shifts according to news and events in the economies of countries around the world. The influential areas for stocks include industrial and consumer companies, news regarding major currencies for the forex market, and commodities like crude oil and wheat.
  • Capital spending sensitive: The last group is also commonly known as the late-stage sector because it moves later than the rest of the economic cycle. This includes technology groups, energies and materials in stocks, and resource currencies such as the Australian dollar, Canadian dollar and Swedish Krona.

Each of these groups is influenced by different factors and in different ways, which makes careful analysis and understanding vital for success. Changes in the economy, news and releases, political developments, political threats and interest rates all affect the conditions of the various markets. As a trader, you should include the analysis of these influences and markets as a part of your strategic trading tips.

Developing effective strategies

Many platforms and brokers offer tools to aid portfolio diversification, such as the Portfolio Mixer with CMC Markets. These allow you to track and monitor how your chosen asset classes and instruments have performed over a certain period of time, along with any potentially influential news or events. You can then use this information to develop your strategies according to graphs and trends.

The key to this strategy is adjusting your portfolio and strategies according to updated information. This provides you with the chance to improve your trades and perform more profitably. The available functions with each platform can be used across multiple markets and instruments to suit your portfolio. By making room for a diverse portfolio, you can adapt to changes and work around risks. Furthermore, these analyses and charts can be set over any time period, which makes it useful and applicable to short-term traders.

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