Best CFD Broker

Futures or future contracts are contracts to exchange a good or instrument at a set price on a future date. They are considered to be profitable and popular financial instruments. But they are usually relatively expensive which denies traders with smaller capitals to participate in futures trading or to have the chance to diversify their futures investments to lower their risk. However there is a flawless resolution for all these problems. It is called CFDs on futures (contract for difference).

CFD is a contract between the CFD issuer and the trader the buyer/seller where the value of the profit/loss is the difference between the current value of the asset and its value at contract. Hence if a trader opens long with 0.01 lots on CFD BRNF0 (a crude oil contract) your profit/loss would be 0.01 * the price of the future contract when you opened the position – the current price of the future contract

The nature of these great instruments is that they allow the investor to go both short and long on futures with trading volume as low as 0.01 of the original future price (micro lots) allowing traders to diversify their portfolio and buy the futures they want at extremely lower prices. That is not all. It’s also worth mentioning that futures CFD is a leveraged instrument as well who work with a broker offering adjustable leverage on these instruments can increase the profit/risk ratio as they see fit (within certain limits set by the broker), something rarely offered by traditional futures traders.

CFD on futures is a great opportunity for beginners who want to enter the futures markets with their limited funds as well as experts looking for new ways to diversify their futures portfolios and minimize their risks.

Exciting profits await any trader who can take advantage of leverage across any instrument whether it is Contracts for Difference (CFDs), Forex or Futures trading. Whilst the profits can add up the downside can be devastating. Today we’ll take a look at some CFD leveraging basics to keep you on the right side of the ledger.

The absolute basic of leveraging your CFD, Futures or Forex account come down to this. When you use a high degree of leverage, your wins will be excessive and unfortunately your losses will be excessive. There is no way to avoid this basic rule. So your goal should be to use leverage to your advantage and maximize your gains whilst minimizing your losses.

Small stepping stones to leverage success

Once you’ve been bitten by the trading bug and you land your first big win using leverage you’ll likely find this is quickly followed by a big loss. Call it Murphy’s or whatever you like, but if you haven’t experienced it already you probably will. Whilst huge profits do seem alluring its important you put your concentration into protecting your downside and minimizing the amount of leverage you use. On that note, start off really small and don’t exceed more than 2 times leverage or twice your account size. This means on a $10,000 trading float you don’t want to take total positions that exceed more than $20,000.

Keeping your trading leverage at respectable levels

Here are some basic rule of thumb advice to keep in mind when using CFD, Forex or Futures leverage. If you have little to no trading experience, do not exceed more than 3 times your account size. So on a $30,000 account you don’t want to take total positions that exceed more than $30,000. Once you gain more experience you can consider using more leverage but at the outset, don’t exceed this amount. Perhaps with a little more trading experience you can consider using more leverage but remember, leverage is a double edged sword. Its brilliant when its working in your favor and devastating when its moving against you. Stay ‘small’ for as long as possible and enjoy a long, healthy relationship with leverage.

Contracts for Difference and Futures are both forms of financial derivatives. A financial derivative is an instrument whose value is derived from the underlying asset. In the case of CFDs and futures, the underlying asset may be a stock, bond, commodity or more. But the most common underlying asset for both CFDs and Futures is shares. There are three core differences between futures and CFDs. Liquidity, expiry dates and financing.

Liquidity is a standard issue for basically all futures exchanges except for the giant that is OneChicargo – the largest futures exchange in the world. Futures markets have become famous for slipped trade executions (slippage) and bad execution. This is because of the lack of volume associated with the trades. As futures are exchange traded products there is sometimes no counter party to execute the trade at the appropriate level, causing sporadic movements in the price of the future.

CFDs however have almost infinite liquidity because they are (mostly) not an exchange traded product. You are guaranteed to complete your opening order at the price you requested and that was displayed by your broker. While there is some slipped trade executions, this is usually due to synthetic price determination, not lack of liquidity.

Expiry Dates are another big difference CFDs have to futures. Expiry dates exist on futures because in the traditional sense, this is the date that the asset has to be delivered and the agreed price. Since most futures contracts are closed out before the expiry date occurs, the asset doesn’t physically get delivered but technically there is still one in place. This supports the financial markets and allows people who actually want to own the share (or other asset) the ability to obtain it.

Finally, financing is another differentiator between futures and CFDs. They are both leveraged products where there is a borrowing element involved in the purchase and interest is either paid or earned but CFDs are more like purchasing a share with a loan from the bank while futures have their leveraged components priced into the asset.

Futures Markets, Options Trading, Foreign Exchange (FX 0r FOREX), Contracts For difference(CFD), Exchange Traded funds (ETF). Name your day trading poison, which financial instrument do you trade, and how do you decide?

Most people come to trading through the recommendation of a friend or colleague or by attending a trading seminar. You will develop a bias depending on your initial exposures and the compelling sales pitch of the presenter.

Firstly there are no right or wrong choices. Even within brokerage houses there is much divided opinion. My brokers, all of which are very experienced differ widely. My broker trades Futures and ETF’s as a surrogate.

His colleagues express differing opinions, one only trades options, another CFD’s and then there is the Forex guy. This is not an accident as the principal has brought together a team of traders with different interests and experience. One thing for sure is they don’t change from one instrument to the other. They have learnt one system and they stick to it.

They all have valid arguments. The futures guy, says why trade a gold mining CFD or stock, just trade the futures contract. The Forex guy says why trade the futures currency contract when you can trade the FX and not pay commission, the futures guy argues back that the spread is too wide on the FX contract.

They are all right. They are each experts in their own field. This is what you need to become, if you are to succeed in day trading.

So back to you.

If you have access, I would strongly recommend that you attend a trading expo, have a look at all the methods, and importantly do not commit to anything at the expo. You need to go home and access the pro’s and con’s of each instrument.

You will also be presented with software, live trading rooms and educational packages and brokers promising you the earth. Take a step back and a few deep breaths, do not allow yourself to be pressured. Remember you have to work with these people for a long time, if you feel uncomfortable with them in a short encounter then move on. Of course you will be offered all kinds of incentives that you can only get at the show.

Don’t fear, you can get that offer anytime. Just call them say you were offered X price at the expo, if they say the offer has expired, tell them that you will only pay the expo price and that you are prepared to do so only for the next 48 hours after witch you will buy another product.

If they won’t budge on price then go elsewhere, they probably weren’t worth working with anyway.

Read trading magazines and if you attend a few seminars find people already using that system and ask their opinion

One of the most dangerous tools available to Day Traders trading Contracts for Difference, Futures or Forex is that ability to access wild amounts of leverage. Leverage is that incredible ‘double edged’ sword that gives you the opportunity for incredible gains on small amounts of money or unforgiveable losses with small amounts of money. Fortunately, when it comes to leverage, you the trader are always in control providing you know how to trade on leverage sensibly.

Is control really in my hands as the trader?

As the trader you have your trading account of say $10,000 which on some trading accounts like forex, will give you the opportunity to trade up to $1 million in total positions. This is referred to as 100 times leverage and if you think about it, is absolutely crazy and the closest thing you are ever going to experience to gambling without being at the casino.

Fortunately for those who trade sensibly, you’ll understand that you actually do control the leverage on your account and with $10,000 you could trade up to $10,000 in total value which means you are using no leverage. The key point to illustrate here is that you can trade ridiculous levels of leverage and wipe your account out overnight, or you could trade sensibly and use the leverage to your advantage.

Can I triple the results of a trading system using leverage?

When you begin using leverage in a sensible way you’ll begin to appreciate that you can maximize your returns whilst only increasing the chance of drawdown in a small way. Let’s say you had a trading system that made 10% per year with no leverage. That means on your $10,000 account you would make $1,000 gross by the years end.

Imagine then if you traded that same system at 3 times leverage, which means instead of trading just $10,000 worth of position you are now trading $30,000 in total positions. Now you simply apply the exact same trading system which historically has been making 10% per year. The main difference now is that you are using a total portfolio size of $30,000 and 10% of that figure is $3,000. When you work out your return you need to base it on your $10,000 capital since that is exactly what you have. Now you can see that you are making 30% per year instead of 10% and all you did was increase the leverage to 3 times your account size.

My trading systems drawdown is not tripled…

Always remember that trading on leverage amplifies your wins and losses. In relation to your trading system making 10% per year you may have experienced a 4% drawdown at its worst point. If you trade at 3 times leverage then you can expect that your worst case drawdown will be approximately 3 times more than the unleveraged result. As a general rule, always trade smaller than what you are currently trading at.

Finding the best market to trade using Contracts for Difference (CFDs) is a very personal choice but we’ll take a look at some of the key criteria you might want to consider to find the best market for you.

Here are 3 components that will make the most difference to choosing the ideal CFD market.

1. Trading a market that allows zero brokerage

2. Trading a CFD market with the right amount of volatility

3. Identifying your preferred trading timeframe and trading style

1. Trading a market that allows zero brokerage

First we will have a look at the concept of trading those products with no brokerage and the best way to get started is to keep your brokerage to an absolute minimum. There are some fantastic products that enable you to trade CFDs with zero brokerage or zero commission like index CFDs or Foreign Exchange. Not only are Index CFDs and Forex commission free but you can trade then for as little as $1 per point movement. When you are starting out, trading at $1 per point is a low risk way to ‘dip your toe in the water’ and get some live trading experience.

2. Trading a CFD market with the right amount of volatility

The second criterion to consider is market volatility. Most people trade Contracts for Difference on a short timeframe so selecting volatile stocks can give you access to ample opportunity. One of the best ways to identify a volatile market is using an indicator called the average true range (ATR). The Average True Range (ATR) will tell you exactly how volatile your market is on a daily basis. Another way to use the ATR is to fade the market at extreme ATR readings. However those who use this particular method need to have quite a lot of skill before doing so.

3. Identify your ideal timeframe and trading style

Markets like foreign exchange (Forex) and Index CFDs can be traded up to 24 hours per day and you will need to work out the most appropriate time for you to trade and build this into your trading plan. Further to this, you will need to work out what sort of timeframe you are going to trade as a 1 hour chart may not suit your trading personality.

If you are a very short-term trader you may wish to use something like a five-minute chart, therefore products like foreign exchange in index CFDs will be the product of choice, due to be high volatility and ample liquidity. If you’re trying to trade low liquidity stocks and you are using a five-minute chart your find that there’s a lot of dashes which represent no trades and low liquidity. These types of markets will be useless to a short-term trader.

What about the Forex markets?

Taking into account your trading capital will also dictate which markets you can trade. For example, if you have a small trading balance, then trading Forex markets over a medium to long timeframe will be futile. The Forex markets move too fast and have large minimum parcel sizes which mean you’ll go backwards quickly if trying to trade FX on a longer time frame. You will find a shorter time frame with a small trading balance is the best for you.

Futures contracts are contracts to buy or sell an equity or commodity on a specified future date. This means you are either hedging a position you have, or speculating on the long term value of a specific stock, market sector, currency or rate of interest.

There are commodity based futures contracts such as wool and cattle, or equity futures for example those which echo the value of a sharemarket index. Traders can also take positions on government bonds and the AUD versus the US Dollar.

In Australia there is 1 primary market for futures traders, the Australian Securities Exchange – the merged entity from the Sydney Futures Exchange (SFE) and also the Australian Stock Exchange (ASX).

Probably the most active from the local futures is the Share Price Index (or SPI), that is used to reflect the long term worth of the market’s leading benchmark, the ASX/S&P 200.

The SFE is one of the 10 most traded futures exchanges in the world by volume, and is traded in 24-hours a day. It allows investors to speculate on currencies, interest rates, bonds, commodities and equities.

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

If you think that the market or a particular sector is most likely to decrease in value over the coming months but are prepared to ride out the economic downturn, you might want to sell a futures contract which tightly aligns with your share portfolio. If you are correct, the worth of your portfolio will go down, however your loss will be offset by the revenue you make in the sale of the futures contract.

Additionally if you are misguided and the market goes up, so too will the value of your stock portfolio and these gains will combat the losses you suffered on the futures market. This is not a perfect trading plan as your stock portfolio might behave in a different way to the contract, but it will mainly have the benefit of protecting your capital.

Conversely, futures can magnify a bullish sentiment on stocks that you already hold. If you purchased a futures contract with the view that the market was on the rise, not only would your portfolio become more valuable, but also you would reap the rewards of the futures contract, that is accumulating value. This is a more dangerous position to be in as a move in the wrong direction will hurt the worth of both your stock portfolio and your futures contract.

Futures contracts are leveraged positions, which means that the face value of the contract isn’t what you actually pay up front.

Typically, the cost of the contract is only a minor percentage of the underlying value. Therefore, when you’re right, your profits are considerably higher in percentage terms since you’ve only outlaid a small amount of the capital to control more stock than you otherwise could have, if you had acquired 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’ll have to pay the variance.

Though 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 convenient way to trade.

CFDs are an excellent way to speculate and hedge. The use of leverage can magnify profits, but not surprisingly also magnify losses.