# CFDs - What are the better alternatives?



## Twiddle (6 May 2010)

Hi all,

I have been learning CFD trading recently, and I am wondering if someone can give me a quick run down on a couple of questions I have.

Often I find a summarised reply from someone personalised to your question can eliminate hours or searching for information in the wrong places, and help to hone your quest for a comprehensive answer by pointing you in the right direction. 

So any replies would be most appreciated.

1.) Profit/Loss - Does the broker rely on people losing money to make money?


a) CFDs have a spread, how much does that contribute to the brokers   profit as a percentage roughly. I.E would they still be profitable if more than say 60% of the customers were turning a consistent profit, because they make enough from the spread alone?

b) If brokers make profit because most people lose money, is this not an ominous sign of what will happen in the long term to your account?

c) Is there really a class of trader who IS consistently profitable above luck, and is the difference between those and the majority who lose a knowledge/experience thing. I.E Can a person who is smart and dedicated transcend the expectation of losing.

2) Flexibility of CFDs.


a) Lets take trading crude oil as an example. With a CFD I can buy when I want, and exit when I want. Instantly. Is there another instrument I can do this with in both an up and down direction?

b) If yes to a, is there an instrument that does not have a spread, but instead a percentage or one off price?

c) If yes to both above, Why would anyone bother with CFDs?

Basically my research so far shows that If I could trade like I do with CFD's but without the spread, being profitable would be extremely easy. The problem being that your stop loss has to be to far back because you are starting in loss. 90% of the time my short term trades hit my exit point within 1 - 2 mins... but often they will dip momentarily to my stop before heading in the desired direction. That would be fine if I did not have to put my stop loss so far back because of spread...

My trading without stops has been more profitable, but I am not prepared to trade without them. If instead I could still have the flexibility, yet start off neutral my stops become tighter, and my rate of correctly analysing the trend more often than not results overall in a profit.

Is it a case of "Well duh, that is the point of the spread... if you could trade without it would be too easy."?


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## baby_swallow (6 May 2010)

Here's my advice:
- If you DAYTRADE individual stocks CFDs, forget it. This is the quick way to lose money.
- If you "Position Trade" CFDs for several days, then yes.

The main reason NOT to DAYtrade stocks CFDs is the phenomenon 
called "Rising Tide Lifts All Boats", yes, including leaky boats.

If you are SERIOUS active DAYtrader, better off trade the "TIDE" itself which is the INDEX (using index futures)


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## Twiddle (6 May 2010)

baby_swallow said:


> If you are SERIOUS active DAYtrader, better off trade the "TIDE" itself which is the INDEX (using index futures)




Using index futures what kind of flexibility do you have? For example can you close your position at any time no matter what the value, like you can with CFDs?

Also, is there a spread like with CFDs?


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## Sir Osisofliver (6 May 2010)

Twiddle said:


> Hi all,
> 
> I have been learning CFD trading recently, and I am wondering if someone can give me a quick run down on a couple of questions I have.
> 
> ...



 Not long-term  however there are a considerable number of people who invest in CFD's without understanding the risks involved and the need for position sizing and risk management.







> a) CFDs have a spread, how much does that contribute to the brokers   profit as a percentage roughly. I.E would they still be profitable if more than say 60% of the customers were turning a consistent profit, because they make enough from the spread alone?






CFD brokers make money in the following ways...
*brokerage fees on transactions. CFD traders *usually* do a significantly higher number of transactions than normal equity traders primarily due to the skill involved in using a high leverage product. There is also a different pricing regime with the provision of derivitives as a market participant than equities, which is why the brokerage is *usually*lower.

*Margin over cash rate. Normally they take a slice each side of the cash rate. IE Lend it to you at slightly higher than cash rate for a long, give it to you at slightly lower than the cash rate for a short - depending upon the size and volume of trades in the account. They of course are funding this at wholesale bank rates, so whilst the slice is relatively small, the size of the funds involved makes this a worthwhile enterprise for them.

*Account fees. Some CFD providers will charge you account fees for inactivity. They do this because as a client they provide you with a platform like Webiress to access live data. This is an expensive exercise for the CFD provider, but normally they share, bundle and inactivate a pool of licences, so any fees for inactivity *may* just be a revenue generating exercise.


> [*]b) If brokers make profit because most people lose money, is this not an ominous sign of what will happen in the long term to your account?




Yes that would be ominous as you put it, which is why most CFD providers also provide educational services on how to use the product effectively to encourage clients to turn a profit. Like any trading however there will be a proportion of people who know how to use leverage, and a proportion where leverage is like giving a Ferrari Enzo to a sixteen year learner driver on speed.


> [*]c) Is there really a class of trader who IS consistently profitable above luck, and is the difference between those and the majority who lose a knowledge/experience thing. I.E Can a person who is smart and dedicated transcend the expectation of losing.



 I can only speak for myself. Yes it's possible to make a profit in CFD's. Like most trading however you nned to do it long enough until it's tedious and boring to be consistent. 







> 2) Flexibility of CFDs.
> 
> 
> a) Lets take trading crude oil as an example. With a CFD I can buy when I want, and exit when I want. Instantly. Is there another instrument I can do this with in both an up and down direction?




 CFD's are subject to normal market conditions. The CFD provider has to physically buy the underlying instrument (for a long), so the price action is determined by normal market dynamics (depth of bids and asks). If you have ever done a CFD transaction on an illiquid equity you should know what I mean. CFD's are classed as a derivative product, you could look at other classes of derivatives, like Warrants, Options or Futures but be aware that certain derivative products are required to have market makers.







> [*]b) If yes to a, is there an instrument that does not have a spread, but instead a percentage or one off price?
> 
> [*]c) If yes to both above, Why would anyone bother with CFDs?






> *Basically my research so far shows that If I could trade like I do with CFD's but without the spread, being profitable would be extremely easy.*



It's an entirely new style of trading than equities. Adjustments in your trading plan and style will undoubtedly be necessary. I hate to say it but it is a rookie mistake to think that what works in one environment will automatically work in a different environment or product class. I encourage you to back-test extensively before putting real money on the table. 







> The problem being that your stop loss has to be to far back because you are starting in loss. 90% of the time my short term trades hit my exit point within 1 - 2 mins... but often they will dip momentarily to my stop before heading in the desired direction. That would be fine if I did not have to put my stop loss so far back because of spread...
> 
> My trading without stops has been more profitable, but I am not prepared to trade without them. If instead I could still have the flexibility, yet start off neutral my stops become tighter, and my rate of correctly analysing the trend more often than not results overall in a profit.
> 
> Is it a case of "Well duh, that is the point of the spread... if you could trade without it would be too easy."?




I don't know what system you are using for your entry and exit. As I said before, what works well in one envirnment may not work in a slightly different environment. 

Good Luck

Cheers

Sir O


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## Twiddle (6 May 2010)

Thank you very much for your comments Sir O.


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## freddy2 (6 May 2010)

From Wikipedia: Bucket Shop

Bucket shop is a brokerage firm that “books" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange.[1]  These brokerages are also often called boiler rooms. The term is a defined term under the criminal law of many states in the United States which make it a crime to operate a bucket shop. [2]  Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative  interest in a security or commodity  future, but there is no transaction made on any exchange. The transaction goes 'in the bucket' and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator "literally 'plays the bank,' as in a gambling house, against the customer." [3]  Operating a bucket shop in the United States would also likely involve violations of several provisions of federal securities or commodity futures laws[4].


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## >Apocalypto< (6 May 2010)

*Futures.....*....... If trading stocks I hear DMA CFDS are ok but I am not a fan or CFDs personally.


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## Wysiwyg (6 May 2010)

This page has some facts on the advantages and disadvantages of Index and Commodity CFD's. There is no physical delivery commitment for commodity  futures with a CFD.

http://www.contracts-for-difference.com/markets/cfd-markets.html


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## robots (6 May 2010)

hello,

i liked the IG spread betting when they had it although IG gave me hell getting my winnings out

then i went to Tricom Futures, and the process appeared more "official" but got immediately concerned when i started hearing english (the home of all sorts of betting) voices on the after hrs desk

got winnings out of Tricom easy then retired, dont get to wound up in market maker, or direct market access its all bollocks, glossy brochure sales pitches

CFD: Contracts for Difference, you pay/or collect the difference, you own nothing

thankyou
robots


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## >Apocalypto< (6 May 2010)

robots said:


> hello,
> 
> i liked the IG spread betting when they had it although IG gave me hell getting my winnings out
> 
> ...




No DMA is not a glossy sales pitch, it's an actual product. you trade off the ASX book. 

do some more research


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## robots (7 May 2010)

>Apocalypto< said:


> No DMA is not a glossy sales pitch, it's an actual product. you trade off the ASX book.
> 
> do some more research




hello,

many cfd providers offer the ASX book, but the contract is still with the provider and subject to there terms

the ASX has supposedly offered some order over the betting

cfd=contract for difference, you have a contract with CMC, IG, Comsec or whoever else, no big deal

i know when i was doing it the prices would fluctuate massively for no apparent reason, so i set up 200-300 pt stop losses (for spi200) to hold the position

they can make things up and what you have described is a common thing i believe (stopping you out), as many people set up tight stops

goodluck twiddle

thankyou
robots


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## >Apocalypto< (7 May 2010)

robots said:


> hello,
> 
> many cfd providers offer the ASX book, but the contract is still with the provider and subject to there terms
> 
> ...





*Your a Muppet*


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## robots (7 May 2010)

hello,

research?

i liked this one in the CMC documents, DMA CFD section, "CMC markets may hedge the position"

spot on Twiddle, you always playing against the CFD house man, nothing wrong with that if you believe you can beat it, give it a go

the house sets the rules, just be aware of this

goodluck Twiddle

thankyou
robots


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## robots (8 May 2010)

hello,

i like this one in the Comsec ASX Cfd document:

SFECC is the counterparty in the other side of the contract, fantastic

no surprise there with how ASX is positioning itself, ASX, TAB, CMC, IG, Sportsbet

thankyou
robots


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## georgey (8 May 2010)

CMC have a 4 pt spread for the US30 so how is that a big deal when
it can move 1000 pts. I think stops are a waste of time and indicates
too big a position for account size. Risk can be controlled better
with position size (smaller) and scaling in/out. I was long 1 contract 
Aus200 and account varied between down $500 to down $200, then almost
got back to even during normal Aus trading. Come back a bit now but one
can see how too big a position can be disastrous. 
The advantages of CFD's are one can learn the ropes with very small size
without doing too much damage, paper trading is not the same. And don't give
up the day job while learning. If fortunate to build account size, not sure if
CMC would still be best broker to trade with/against but not at that point yet.

A 2 cent spread is no good for scalping but for longer holds is acceptable.
Twiddle, I have no idea why you think it would be easy to be profitable with
a 1 cent spread. A 2 cent spread should be only less so.
Georgey, Auckland, NZ


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## nunthewiser (8 May 2010)

georgey said:


> . I think stops are a waste of time and indicates
> too big a position for account size. Risk can be controlled better
> with position size (smaller) and scaling in/out. I was long 1 contract
> Aus200 and account varied between down $500 to down $200, then almost
> ...




Oh dear.

and what happens if the market fell 500 points + EVEN with a small position?

You still end up with a large loss that IF  left too long where it approaches the providers safety margin on your balance they will close the positions and wipe out your whole account.

But hey you obviously know whats best  for you.

fodder makes the world go round.

i suggest a good read of the  lil financial pdf that ones supposed to  read PRIOR to opening a CFD account .............. some bits in there may explain a lil bit of compounding loss positions and actions taken ......

like i said you obviosly know whats best for you tho


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## tech/a (9 May 2010)

>Apocalypto< said:


> *Futures.....*....... If trading stocks I hear DMA CFDS are ok but I am not a fan or CFDs personally.




End of story.


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## georgey (9 May 2010)

Hi Nunthewiser
What happens if the mkt falls 500pts, the dow fell 1000, my account
fell from about $2000 to 1500 then up again. I have read all the info
from CMC and understand it. The market fell so fast that any stops may 
not have been triggered unless one had a Guaranteed stop which costs.
The safety margin is about $US200 so no danger there. I often sell when
the market isn't being favourable, my argument is that one could use a 
mental stop loss which can work if one is disciplined enough, which most
traders aren't. 
Robots talks about setting 200-300 pt stops, one may as well not bother
but definitely have a point at which one WILL sell.
My plan was to hold a very small position overnight with no stop and the 
worst that would have happened (in the greatest % drop since 1987) would have
been a $700 loss. I would take that risk for a once in every 23 year event.


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## nunthewiser (9 May 2010)

georgey said:


> Hi Nunthewiser
> What happens if the mkt falls 500pts, the dow fell 1000, my account
> fell from about $2000 to 1500 then up again. I have read all the info
> from CMC and understand it. The market fell so fast that any stops may
> ...




robots is special 

Good luck with your strategy, not my cup of tea.


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## Twiddle (10 May 2010)

georgey said:


> A 2 cent spread is no good for scalping but for longer holds is acceptable.
> Twiddle, I have no idea why you think it would be easy to be profitable with
> a 1 cent spread. A 2 cent spread should be only less so.
> Georgey, Auckland, NZ




It makes quite a difference when you are doing many small trades. If your ratio is day 7/10 for picking correct direction, your profits are hurt when the 3/10 stop too far down. With a large spread, you cannot tighten your stops, so it makes profitability less, even with a good prediction rate.

I am talking for trades that last under 2 mins, lots of them.


For example with 10 trades. My limit being 2 points up. And my stop being 2 points down. If I am 70% correct on my predictions it equals.

+2
+2
+2
+2
+2
+2
+2
= 14 points profit.

-2
-2
-2
= 6 points loss

Total = 8 point gain.

However with a 3 point spread for example, the stop has to be at a minimum 5 points back, if I want a 2 point stop, cause I am starting 3 points backward already because of the spread.

+2
+2
+2
+2
+2
+2
+2
= 14 points profit.

-5
-5
-5
= 15 points loss.

Total = 1 point loss.


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## Kryzz (10 May 2010)

http://tremblinghandtrader.typepad.com/trembling_hand_trader/2007/06/the_real_cost_o.html


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## Twiddle (10 May 2010)

Kryzz said:


> http://tremblinghandtrader.typepad.com/trembling_hand_trader/2007/06/the_real_cost_o.html




Thanks for that Shaunkris89 and Trembling Hand. That sums up exactly what I was meaning.

Quick question; with the futures contract in the scenario, what kind of flexibility to you have to close the position?

With a futures contract are you locked into the limits/timings you set right at the beginning of the trade?

For example, with a few CFD trades I have decided after observing for a while that my limit is not going to get hit, and it is about to turn nasty. So I close the position at the point it is at instantly, and take the profit. Albeit not as much as I was hoping.

Can you do this with futures also?

(apologies for my ignorance, I have no experience with futures at this stage)


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## nomore4s (10 May 2010)

Twiddle said:


> Can you do this with futures also?




Yes.

The best way to sum it up is - Professionals trade the Futures, wannabe traders with accounts too small and/or limited understanding of the markets trade with CFD's.


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## Twiddle (10 May 2010)

nomore4s said:


> Yes.
> 
> The best way to sum it up is - Professionals trade the Futures, wannabe traders with accounts too small and/or limited understanding of the markets trade with CFD's.




Cheers nomore4s.

I don't plan on trading for a long time yet (demo trading atm), as I want to build up as much knowledge (and capital) as possible and have worked out a successful trading strategy first.

Could you answer me this though.

What would be the minimum account size you would recommend for getting involved in futures trading?


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## nomore4s (10 May 2010)

Twiddle said:


> What would be the minimum account size you would recommend for getting involved in futures trading?




Probably a minimum of $25,000 but it also depends on what your goals and expectations from trading will be.

If looking to trade full-time for a "wage" I personally think you would need at least $50,000 plus $50,000 to live off for the first year.

If only looking to earn addition income to support your normal wage $25,000 is probably enough(depending on skill level of course). You could actually get away with less but you would need to be extremely skillful & experienced to make it work imo.


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## Twiddle (10 May 2010)

Thanks again.


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## nunthewiser (10 May 2010)

nomore4s said:


> Yes.
> 
> The best way to sum it up is - Professionals trade the Futures, wannabe traders with accounts too small and/or limited understanding of the markets trade with CFD's.




rubbish


And some traders ONLY use cfd,s for *shorting the odd ASX listed stock *..nothing more


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## >Apocalypto< (10 May 2010)

nomore4s said:


> Yes.
> 
> The best way to sum it up is - Professionals trade the Futures, wannabe traders with accounts too small and/or limited understanding of the markets trade with CFD's.




Sorry Nun I agree with parts of this. over 96% of the fulltime traders I have spoken to trade futures options and shares. Never met a full time CFD trader. One full time options trader used CFDs only to hedge.


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## nunthewiser (10 May 2010)

>Apocalypto< said:


> Sorry Nun I agree with parts of this. over 96% of the fulltime traders I have spoken to trade futures options and shares. Never met a full time CFD trader. One full time options trader used CFDs only to hedge.





Thats great ,you guys are obviously correct then.

I am obviously a wannabe trader with a tiny capital base because i never took the time to look into option trading and prefered to keep my ASX listed stock trading simple to ME by using a non leveraged instrument for going long(basic chess sponsored mother stock purchase via a non cfd broker) and a basic DMA based CFD provider for going short .

Sorry guys will stick to the general chat and leave the expert comments to you guys that know other guys that know stuff .


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## nunthewiser (10 May 2010)

mmm  actually i think i read somewhere in these threads that radge also uses MAN finacial DMA cfd,s also in the past . If i had the time i would dredge up a post or two where he mentioned them but i havent so will just take it as he just another wannabe with no cash sort of trader also.

Funny place internet forums.


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## >Apocalypto< (10 May 2010)

nunthewiser said:


> Thats great ,you guys are obviously correct then.
> 
> I am obviously a wannabe trader with a tiny capital base because i never took the time to look into option trading and prefered to keep my ASX listed stock trading simple to ME by using a non leveraged instrument for going long(basic chess sponsored mother stock purchase via a non cfd broker) and a basic DMA based CFD provider for going short .
> 
> *Sorry guys will stick to the general chat and leave the expert comments to you guys that know other guys that know stuff *.




don't take it personally, maybe you can be the first!


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## nunthewiser (10 May 2010)

Yep i lied , i did have the time ..........

So..................

who is gunna break the news to Radge that he obviously a "wannabe trader with no capital base" ? ........ 

 geeeezus


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## nunthewiser (10 May 2010)

Glad to see im not the only one that dribbles unsubstantiated crap in these threads at times...........

As you were boys .


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## nomore4s (10 May 2010)

nunthewiser said:


> rubbish
> 
> 
> And some traders ONLY use cfd,s for *shorting the odd ASX listed stock *..nothing more




Geez nun don't give yourself a hernia.

I was in general referring to trading things like futures, using CFD's to short ASX stocks is really the only option in many cases but for trading futures and other instruments it is too expensive to be considered for regular use *imo*.


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## nunthewiser (10 May 2010)

nomore4s said:


> Geez nun don't give yourself a hernia.
> 
> I was in general referring to trading things like futures, using CFD's to short ASX stocks is really the only option in many cases *but for trading futures and other instruments it is too expensive to be considered for regular use **imo*.





LOL no hernias mate .

Just pointing out the post i quoted from you was a little bit cheeky and not true in my view .

However TOTALLY agree on this post .

Cool now we can be Bro,s again  . Dunno about that other fella tho


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## georgey (11 May 2010)

I had over 100 grand 10 yrs ago and lost it all with warrants and leveraged stock trading.
Now back on track with a lovely girl (only 55yrs young) and a big mortgage to pay back, this
gives me a great base to work from (mortgage comes first). My paltry 2 grand with CMC allows me
to learn what I didn't know before. The small size takes the pressure off while one is learning
the multitude of little things one needs to absorb into ones subconcious to be a better trader.
Time in the market and at the screen is vital and the small size allows that. As Tom Baldwin in 
Market Wizards hinted "if you stay at something long enough, you have to pick it up". Just like
walking, keep at it and you will learn in your own way, just don't fall off a cliff in the meantime.
Looks like I would need to get my account up to about 25 grand and be trading up to 25 contracts with
CFD's when I would consider moving to futures with the smaller spread. Need to slowly get used to
being down $250 on a measly 10 pt move. That will be 2-3 yrs away I think, if at all.


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## Twiddle (11 May 2010)

From the looks of it, different trading instruments suit different objectives. With knowledge and experience comes the ability to exploit the useful ones in various ways despite any inherent flaws they might posses.


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