ichi360

As promised earlier, here is the detailed post on how to trade CFDs and specially the Share CFDs.

First of all, a bit of explanation: CFD is not a dramatically different thing for those who have traded Forex before because they are already aware of how the Leverage based Trading system works.

One thing you may have to consider is where  you live and / or where your Broker is located, some countries such as USA does not allow CFD Trading and the Brokers in that country can not offer you this trading product. CFDs in general are quite popular in United Kingdom and Australia and perhaps its the fastest growing Trading Business Model already.

CFD can be traded on any Financial Instrument such as Forex, Stock Index or Futures, Commodities, Bonds or simply Shares. Here is basic information:

1. CFD stands for Contract For Difference
2. CFD can be traded both ways which is Long and Short
3. CFD’s Leverage depend on the agreement between you and your broker
4. Depending on the Financial Instrument, you may have to pay Interest to your Broker based on the agreement and time you remain in trade
5. Profit or Loss is calculated based on the Difference between the Price your entered into trade and the price you decided to close your trade

Now here is a typical example:

Suppose you wanted to go Long on ANZ “Australia / NZ Banking Group” listed on Australian Stock Market ASX. Why you wanted to go long / buy the shares will of course depend on your trading system or strategy, we’re pre-dominantly Ichimoku Followers here so I’ll cover the same concepts here. In the chart example I’ve attached, we go long because we believe there is a Kumo Breakout in the Bullish direction.

If you were to trade Simple Shares and suppose you wanted to buy 1000 Shares at the price of 22.19 you would have to invest 22,190$ plus paid Broker Fess which we assume at the rate of 30$.

Now the same thing if you’re trading as a CFD, your Broker may say that I’ll get 5% deposit from you and provide you 95% leverage for your trade. In that case the Broker will ask you to provide 1109.50$ and the rest of the 21080.50 comes from the Broker itself.

You’re now exposed to a 22k worth of Share Portfolio by depositing 5% of its actual cost.

Now as you can see in the chart that we placed our Stop Loss at 21.74, the difference between the price you entered (22.19) and your Stop Loss is 0.45, your Total Potential Loss in this case could have been 450$ (0.45 * 1000)

Because you did a nice homework before entering into a Trade and you knew what you were doing, the trade went into your favour and the price has touched its highest level of Monthly Resistance at 24$ (price went up to 23.98 just 2 cents below the Resistance line). If you’re a conservative trader and don’t like to push your trade too hard, you might want to choose a better / realistic Profit Taking zone which was ideally placed at 23.77 which was the first level of Resistance for ANZ.

If you had covered your Trade at 23.77, the difference between the price you entered and the price you covered your Long trade will be 1.58$ and total profit will be 1580$ (1.58 * 1000)

Now lets cut 20$ for the commission that you have to pay to your broker for the trade and plus around 50$ as the Interest charges for the Leverage Fund you enjoyed for your trade. Your net Profit will come to around 1510$ by depositing 1109.50$ … this is clearly above 100% Return on Investment

Question is why do you need to trade CFDs ?

I find it hard to believe that anyone who is serious about trading and want to become a Full time trader can actually just trade one particular market and that too during few specific times such as Forex during London hours. If trading is what you want to do for the rest of your life, you have to look for various Investment / Trading opportunities, you may have to trade Shares on Australian market plus few on FTSE in UK and then Forex during the times that market becomes active and may even want to look at Commodities and Future Index things. You may say that this requires a lot of time and attention but that is why I always keep saying that your trading system has to have a Diversification between not only the Markets you trade but also the Timeframes

Some people have adopted a narrow minded approach where they think trading is all about Scalping on Forex and as long as you scalp 10 pips here and 20 there you’ll be fine. You may very well be but definitely not on long term basis, if this is the thing you want to take on as a business you must start looking for a balance between Short Term Scalping and Longer Term Investments

I’ll just give you few examples for long term trades:

1. Barclays on FTSE was trading at around 0.75 during March 2009, it is now trading at 3.28 (even after a massive pullback since November 2009)
2. BHP Billiton on ASX was trading below 30$ in early 2009, it went up to 45$
3. RIO Tinto on ASX was trading below 45$ during early 2009, it went as high as 80$
4. Google was at 290 and went to 629

These are just few examples of what you could do and what you can do in future … Sky is the limit IMHO

Good luck and trade smart because I know you can