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What is CFD Trading and How it Will Get You to Alpha

Let’s face it, you are an active trader and you want to WIN BIG.  Breaking won’t cut it and  as such you are looking for every possible edge you can get.  However, this is becoming harder as the same technologies which helped traders 10 years ago are now working to give the big boys on the block an almost insurmountable advantage.

The good news is that all is not lost.  One play which you need to be plugged into is CFD – that’s right Contract for Difference.  While it is an arbitrage tool that has been around for a while, advances in CFD trading will get you the Alpha you want.

What is CFD Trading?

Each trade has a gap, and that space is where the CFD exists.  This difference between where a trade was exited and where it is entered is a great opportunity for traders who are looking to realize profits without owning the underlying assets.

Another reason why you need to add CFD trading to your arsenal is that it is relatively simple to understand and execute.  For example, 100 shares of a stock are on offer for $30.00 per share.  The total value of the transaction would be $3,000 and if a trader is using a traditional broker, then they will probably need $1,500 in cash before the order is executed.

However, a CFD brokers can offer a margin of 5% or less – as such the trader only needs $75 to execute the same order.  Talk about a big win as you can max out your gains while taking minimal risk.  In addition, you have more cash to execute even more trades and this means you can afford to take on even bigger positions.

One thing to know about CFD trading is that once the trade has been entered it will show a loss equal to whatever the spread is at the time.  If the spread was five cents for the spread above, then the share in question would need to gain the six cents before it would register a profit.
In addition, a CFD trade may carry a slightly higher price, though this is part of the tradeoff.  However, these instruments are all about arbitrage, so the key is to look for high frequencies that can deliver solid returns. 

Given that the commission structures for CFD trades are dramatically lower than most other trades, these trades tend to be a net winner for the trader.  This does not mean that there is no risk involved.  But as an active trader, you should be well acquainted with the challenges of coming out of the markets unscathed.

If you are interested to learn more, then you might want to check out this platform – https://www.tradedirect365.com.au/ as they offer a clean interface and are recognized as one of the best value CFD provider in Australia.  No matter who you choose make sure the have a demo account as this will give you a feel for the platform.

What Else Should You Know?

As you can see CFD trading allows for significantly higher leverage than other trades with margins ranging from 2% to 20% depending on the asset class.  Though you do want to keep in mind that the higher the leverage the greater the potential to magnify the loss.

In addition, you can’t short or borrow CFDs and if this is a big part of your trading strategy, then these instruments might not be the right fit for you.  Given that every trader is looking for a way to diversify their positions and this give you a chance to allocate just a small portion of your AUM into an often-overlooked segment of the market.

This brings up another point.  While this segment of the market is often overlooked, it does not mean that you have entered a dark corner.  In fact, most CFD providers are extremely professional and offer the same quality of service you have come to expect from other brokers.

Now we get to the fun part.  You can trade CFDs in a variety of markets and sectors.  These include bonds, commodities, currencies, stocks, and even indexes. 

As you can see, CFD trading is a great way for you to get the alpha you are looking for and if you haven’t considered it as part of your trading strategy, then you might want to take a closer look.

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About Becky Wilcox

Becky Wilcox is a freelance writer who has an ear for personal finance, debt, and equities. In her spare time she loves to pursue a healthy lifestyle along with trying new dishes in the kitchen.