Choosing a CFD Trading Platform


To choose a CFD Trading Platform you need to know the different types and their advantages and disadvantages.

They can be classified into two types:
Marketmakers construct their own market in a way that they mimic the movement of stock prices or indices. When you place an order to buy or sell according to their market they may or may not translate that into a buy or sell into the real market. If they are large enough they may simply carry the risk themselves like a bookmaker on the race track who lays off the odds in relation to the total position they hold. If they do this, the prices they offer clients can vary from the actual bid/ask prices being offered in the market.

Direct Market Access differs in that the bid/ask prices directly reflect the live market and when you place orders they are at the market prices. When you place your order the provider immediately places the order into the market and buys or sells in the live market accordingly. DMA platforms can also show market depth and even allow the customer to place orders at prices they choose, rather than simply at the market price. For professional traders this is the preferred type of platform to use, because they can determine exactly the conditions under which they place a trade in line with their trading methodology.

Within these two broad categories there are variations between different platforms and anyone wishing to trade CFD’s should investigate carefully the precise nature of the trading platform they propose to use. Things you should consider are:

Fees
Some Marketmaker platforms offer a very low fee but will have a wider spread between the bid/ask prices. This in effect increases the cost to the customer for each completed transaction.
 
Fees on DMA platforms are invariably slightly higher, but you are getting the same spread between the bid/ask prices as is available in the market. The final transaction cost may even prove to be less than that offered by the Marketmaker although their apparent fee is lower.

Different providers have varying scales based on the monthly volume of transactions and these are spelt out in the documentation each customer agrees to when they sign up for their account.

Leveraging
Leveraging is the prime reason for trading CFD’s because they enable you to magnify your trade profits significantly, but they also work in reverse and can magnify your losses as well. Different Platforms may offer differing product offerings. Some can be more highly leveraged than others, and some will offer different product groups. For example you can choose Indices, Shares, Options and Forex on some platforms. Others will only offer some of these products. Some will only offer the top stocks or even a subset of them. Each provider defines in their product disclosure statement what is being offered, and this can change over time if they decide to expand their offerings. The amount you can leverage varies from provider to provider, and whether you are trading indices or shares. Typically, depending on the volume and liquidity of shares, providers may offer 20:1 10:1 or 5:1 leveraging. If you are trading indices contracts then the leverage can be as high as 100:1.

This means you require a margin of 5%, 10% or 20% for the shares you wish to trade, or only 1% for indices.
You also pay interest on the funds you have borrowed for the trade for every day you remain in the trade. Transactions completed within the day are not charged the interest on the borrowings, and this is a big attraction to Day Traders who focus on short time frame trades. Traders who focus on time frames of a few days to a few weeks maximum do encounter the interest charges, and the price needs to be increasing for long trades and decreasing for short trades to cover them. Sideways movements for any length of time will be a drain on Capital, because of the interest charges.
 
Interest Charges
If you are trading Long there will be a daily interest charge for the use of borrowed capital. This is usually set at a margin above whatever the current daily bankrate is, and is typically 2.5 to3%. If you are trading Short then the margin is deducted from the normal bank interest rate.

Dividend Payments
When dividends are declared they are typically paid to the customer trading Long and are paid by the customer trading Short. These payments are usually made on the declaration date but may vary from provider to provider in accordance with their product disclosure statement.

Choosing a Trading Platform
Your choice of a CFD Trading Platform is yours to make, but do READ the disclosure documents provided to prospective customers so that you UNDERSTAND exactly what is being offered and how you will be charged. If you enter into transactions without this understanding you may find yourself making mistakes that could have been easily avoided with a bit of preparation.

Advantages and Disadvantages
The major advantage of CFD’s for leveraging trades is: there is no time decay as with Options. This makes them much simpler to understand and use. Used wisely CFD’s can be very rewarding and profitable, but if you use them incorrectly they can be a very expensive lesson. There have been numerous stories of people trading CFD’s going broke very quickly.

The major disadvantage is that you can lose more than is in your account. The key is to use Stop Losses to get you out of a trade that is going bad before you erode your capital. This means you must learn and use the appropriate Risk Management strategies. Without them it is a slippery slope. The key advantage Options have over CFD’s is the maximum that you can lose is the amount of the trade. This can be determined before you even enter the trade.
 
Trading Profitably
Getting the direction of the trade right is a good start, getting out of the trade profitably is good risk management. Setting your stop loss on what you are prepared to lose on the trade protects your capital. Letting your profits run and raising your stops leads to greater profitability. In volatile markets this can mean exiting with a loss if your initial direction is wrong and you set it too tight. Then you see the price reverse direction and go on to make significant profits in both long and short trades. This frequently happens when you are working with small amounts of capital and try to protect it from erosion. Murphy’s law or Fear of Loss are usually attributed to this situation.
 
If you cannot set your stops appropriately then you should ask yourself if you should even be in the trade. Understanding this, and planning accordingly, takes you to the next level in your trading. One motto I like from Options University is Trade Smart, Not Often. The art of setting Stops is another topic for study.

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