Welcome To The BrokersStation E-Books
Thank you for choosing Brokers Station as your trusted partner into the world of CFD’s trading. We’re always looking for ways to make things better for you and enable you to focus on trading. The purpose of this E-Book is to compile all the important talking points from the website and give you a kind of quick course into CFD’s trading. If you don’t feel like browsing around the platform and putting together all the information by yourself, here it is in one place. Starting from the basics and going deep into the world of strategy and chart analysis, you will find all the information you need in order to get started.
- How to get started?
- Explaining CFD’s Trading
- Reasons for trading CFD’s
- What assets can I trade with?
- Chart Types
- Understanding Short term trades
- Understanding Hedging
The difference between where a trade is entered and exited is the contract for difference (CFD). A CFD is a tradable instrument that mirrors the movements of the asset underlying it. It allows for profits or losses to be realized when the underlying asset moves in relation to the position taken, but the actual underlying asset is never owned. Essentially, it is a contract between the client and the broker. Trading CFDs has several major advantages, and these have increased the popularity of the instruments over the last several years.
How To Get Started?
The answer to that question depends essentially on your general stock market experience altogether. If you have at least some familiarity with stock trading, then it wouldn’t be too difficult to grasp the way this type of trade is traded. In its essence, CFD’s trading is really easy and straightforward.
Nevertheless, it is important to follow a few rules, and gather at least some experience before venturing into this exciting game with extremely high profit opportunities. So if you do not yet have extensive knowledge in financial trading, this is absolutely not an obstacle. However, we advise you to first create a free demo account and make a few tryout trades before actually doing any real trading.
Explaining CFD’s Trading
How a CFD Works
If a stock has an ask price of $25.26 and 100 shares are bought at this price, the cost of the transaction is $2,526. With a traditional broker, using a 50% margin(leverage), the trade would require at least a $1,263 cash outlay from the trader. With a CFD broker, often only a 5% margin is required, so this trade can be entered for a cash outlay of only $126.30.
It should be noted that when a CFD trade is entered, the position will show a loss equal to the size of the spread. So if the spread is 5 cents with the CFD broker, the stock will need to appreciate 5 cents for the position to be at a breakeven price. If you owned the stock outright, you would be seeing a 5-cent gain, yet you would have paid a commission and have a larger capital outlay. Herein lies the tradeoff.
If the underlying stock were to continue to appreciate and the stock reached a bid price of $25.76, the owned stock can be sold for a $50 gain or $50/$1263=3.95% profit. At the point the underlying stock is at $25.76, the CFD bid price may only be $25.74. Since the trader must exit the CFD trade at the bid price, and the spread in the CFD is likely larger than it is in the actual stock market, a few cents in profit are likely to be given up. Therefore, the CFD gain is an estimated $48 or $48/$126.30=38% return on investment. The CFD may also require the trader to buy at a higher initial price, $25.28 for example. Even so, the $46 to $48 is a real profit from the CFD, where as the $50 profit from owning the stock does not account for commissions or other fees. In this case, it is likely the CFD put more money in the trader’s pocket.
Reasons For Trading CFD’s
There are many good reasons for trading CFD’s.
- Trading in the real Financial market
- In the traditional financial markets, there are several factors which the dealer must conduct by. Leverage, margin, this factors help the regular trader and can have a great impact on trade profits.
- More trading choices.
- We offer up to 2000 tradable assets. That means you have access to 2000and above different financial assets, with which you can make money at any time
- Reduced trading costs.
- If you live in the USA and trade with Forex, then the new guideline of the “Commission for the Goods and Futures Trading” demands that you open an account with at least 25 000 USD for Forex trading and even more for the trading of traditional options. However, on the CFD’s market you can enter with just 1000 US Dollars and no other capital is required to start trading.
- Better profits
- The profit shares which the trader can achieve are usually higher than on any other market. Profits vary between 10% and 50% in regular trading and up to 500% in speculative high-yield investments. You can also trade with shorter run times and open up the possibility to even bigger profitability.
What Assets Can I Trade With?
There are four main classes of assets that can be traded on the market for CFD’s:
Currencies are the most common asset class and can be traded on the market for CFD’s with an operational status of 24 hours. The market features a wide range of currencies, including the most popular currency pairs such as EUR-USD or GBP-EUR and so on.
Shares are the second most traded asset after currencies. Our website offers a wide portfolio of tradable shares such as technology stocks – Apple, Microsoft, Google, Facebook and many more.
Normally, the equity indices are only open for a few hours a day, if the parent indexes are open.
Some goods are often underrepresented in the market for CFD’s, but gold, silver and petroleum are almost always listed. IBA Markets also offers a wide variety of other commodities which is a big bonus for our traders.
Most beginning traders prefer to use simple line charts, mainly because of the clarity and perhaps due to the lack of other alternatives. Unfortunately, line charts are relatively unsuitable for most analyzes, because a lot of the information is lost. The connected dots represent only the closing prices per unit of time – what happens during this time unit, you do not know.
Bar charts are quite more revealing and insightful. They consist of individual bars or rods, which show the maximum, the base, the opening and closing prices. Each bar represents a single time unit: On a daily chart a single bar represents a whole day. On a 5-minute chart a single bar represents 5 minutes and so on.
Candlestick charts are very widespread nowadays. Actually, the information they contain is the same as in a bar chart, but presented in a better graphical way. That`s why candlestick charts are easier to understand and follow, even with an untrained eye. The single candle consists of a wick, a fuse and a body. The wick and the fuse mark the maximum and the lowest values. The body describes the opening and the closing prices. A candle can represent different periods of time, same the bar chart.
In general, candles are displayed in different colors, depending on whether the price has gone up or in each time interval. There is usually an emphasis on the interval between the opening and closing prices. Therefore candlestick charts are very well suited for those markets where this interval is particularly important, for example in equity markets. In markets which are traded around the clock, for example the Forex market, bar charts often make more sense. Ultimately, choosing a chart type depends on your personal preferences and trading needs
If you are using line charts, then we advise you to stop doing it and change this habit immediately. Line charts are simply not suited for the necessary CFD analysis. Of course there are some exceptions. For example if you’re looking at a very long time interval a line chart can be sufficient.
Understanding short term trades
Short-term trading can be very lucrative, but also risky. A trade can last for as little as a few minutes to as long as several days. To succeed at this strategy, traders must understand the risks and the rewards of each trade. They must not only know how to spot good short-term opportunities, but also how to protect themselves from unforeseen events. In this article, we’ll examine the basics of spotting good short-term trades and how to profit from them.
Hedging is a strategic move in trading, which lets you minimize losses when you see that the trade is not going your way. Imagine the following situation: The trader has entered on a “long” on a certain level, for example on the DAX. After the end of the day the trade is “in the money” and the trader is expecting a rich book profit. However due to some economic events, the courses start to crumble and the trader runs the risk that the trade falls out of the money and therefore the transaction is a losing position. The method for hedging these profits is generally referred to as pairing.
In order to hedge the trade, the investor now purchases a second trade on the falling prices, which is a “Short”. The first trade is actually falling out of the money and would make a great loss. In this case the second position is supporting the first one. While the first position still remains in the money, the second one is going to be a loss. However, this is offset by the gain in the long Position.
This strategy should be applied only when there is an early change in the price direction. For example, this can often be applied when a major resistance line is tackled. Of course, it is always possible that the prices close at a time in which both positions are “in the money” which is a particularly desirable outcome.
Thank you for reading the BrokersStation E-Book introduction. We hope that this digest of all the important CFD topics has been helpful to you and will prove valuable to you trading in the future. Remember that CFD’s is a field with big potential and can reward you greatly if you approach it with sincerity and effort.