CFDs - What are the better alternatives?

[Twiddle]

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."?

 

[baby_swallow]

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)

 

[Twiddle]

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?

 

[Sir Osisofliver]

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.

So any replies would be most appreciated.

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

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 usuallylower.
  
  *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

 

[Twiddle]

Thank you very much for your comments Sir O.

 

[freddy2]

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].

 

[>Apocalypto<]

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

 

[Wysiwyg]

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

 

[robots]

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

 

[>Apocalypto<]

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

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

do some more research

 

[robots]

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

 

[>Apocalypto<]

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

Your a Muppet

 

[robots]

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

 

[robots]

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

 

[georgey]

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

 

[nunthewiser]

. 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.
.
The advantages of CFD's are one can learn the ropes with very small size
without doing too much damage Georgey, Auckland, NZ

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

 

[tech/a]

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

End of story.

 

[georgey]

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.

 

[nunthewiser]

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.

robots is special

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

 

[Twiddle]

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.