How Do You Trade CFDs
in Australia?

How Do You Trade CFDs
in Australia

Contracts for Difference ("CFDs") are popular among investors who actively trade the financial markets across the globe. Their popularity was fuelled by the introduction of CFDs in Australia in 2002. The Australian CFD market grew quickly and in just five years, Australia became the first country in the world to offer exchange-traded CFDs in addition to OTC CFDs.

With an exciting history, CFDs have risen to become the most common method of derivative trading in the Australian market. They are regulated by the Australian Securities and Investments Commission (ASIC) and come with various trading advantages. However, they are also complex and carry potentially high risk. If you’re going to trade CFDs, it’s vital to know how the market works and this article will help you do that.

What is
CFD Trading?

Contracts for Difference ("CFDs") are popular among investors who actively trade the financial markets across the globe. Their popularity was fuelled by the introduction of CFDs in Australia in 2002. The Australian CFD market grew quickly and in just five years, Australia became the first country in the world to offer exchange-traded CFDs in addition to OTC CFDs.

With an exciting history, CFDs have risen to become the most common method of derivative trading in the Australian market. They are regulated by the Australian Securities and Investments Commission (ASIC) and come with various trading advantages. However, they are also complex and carry potentially high risk. If you’re going to trade CFDs, it’s vital to know how the market works and this article will help you do that.

What CFD
Instruments are
Available in Australia?

The Australian market offers a diverse range of CFD instruments, allowing for a lot of flexibility and efficiency. Some of the commonly traded instruments include:

  • Forex – foreign currencies are the most-traded financial instruments in the world and they provide a lot of liquidity.

  • Equities/stock/share CFDs – these account for the most commonly traded CFDs.

  • Indices – stock indices like FTSE 100, S&P500, Australia (ASX) 200, and many others enable traders to gain exposure to the stock market and international stock portfolios.

  • Commodities – traders can take advantage of trading soft commodities (agricultural products and livestock) and hard commodities (metals and energy) with minimal transaction costs and margin.

In recent years, cryptocurrencies and most notably bitcoin have become a globally recognised digital asset and cryptocurrency CFDs have also started gaining traction in the market.

One of the most appealing aspects of CFD trading is that it gives you exposure to international instruments you may otherwise have been unable to access. For example, CFD trading in Australia means you can indirectly trade shares of big companies like Apple and Google without having to own the shares.

What are the
Steps to CFD
Trading?

1. Prepare for CFD Trading

When it comes to the fundamentals, CFD trading is no different from trading other financial markets. You need to know what you are doing. It’s important to conduct thorough research and familiarise yourself with how CFDs work before you begin online trading. This is especially important for CFDs due to their complexity and the high risk they carry.

You also need to formulate a robust and comprehensive plan for trading. Among other things, the trading plan needs to outline realistic trading goals, your capital outlay, risk appetite, trading strategy, and risk and money management plans. You will also need to learn to stick to the plan and refine it as you learn the dynamics of the mark.

2. Choose a Reputable CFD Provider

The careful selection of a CFD provider is one of the key steps in building a winning trading strategy and increasing your chances of potentially getting something out of CFD trading. You have to ensure that a broker meets your trading expectations and requirements when you open a CFD trading account. A broker also has to match your trading style and provide you with the right tools and support. The best CFD traders are the ones who understand market dynamics. CFD brokers can perform an invaluable service by providing their clients with access to the finest charting tools, market updates, economic calendars, expert financial insights, signal indicators, webinars and a comprehensive FAQ database.

The following are some of the questions you need to ask when looking for a CFD broker:

  • Is the broker regulated in Australia? Confirm that the broker is regulated by the ASIC and that they have a valid Australian Financial Services (AFSL) licence number.

  • Which instruments and asset types does the broker offer? For instance, not all brokers offer CFD trading on equities and some do charge an extra fee to access the equity CFDs.

  • Does the broker provide educational resources to help you trade? CFDs are intricate. You need a broker who helps you build a strong understanding of the market if you’re going to make CFD trading worthwhile.

  • How much does the broker charge in commissions and do they offer reasonable spreads? You want a broker who gives you a good trade-off between the cost and the quality of trading.

  • What is the broker’s minimum opening balance? Some brokers require a high initial deposit to open a CFD account and start trading.

  • Which CFD trading platforms and software does the broker offer? Confirm that the broker offers a flexible trading platform that comes with analytics tools and allows you to add on any software you may require as you trade.

  • Does the broker offer good support? You need a broker who will be there when you need them.

3. Choose the Instrument You
Want to Trade

With so many CFD choices to choose from, you need to find the instrument that suits you. This is one of the instances when selecting a broker with sufficient educational resources is important. With the right resources, you can identify the instruments and trading opportunities that match your trading style and risk appetite.

4. Decide to Buy or Sell

One of the main advantages of CFD trading is that it allows you to speculate on price movements in either direction – there’s potential to profit as the market rises or as it falls. If after some market analysis, you believe the market price of the underlying instrument will go up, you buy (go long). If you believe the market price will go down, you sell (go short).

For example, if you think the price of Google shares is going to fall, you can sell an equity CFD on the company. You will earn a profit if the shares drop in price and you will have a loss if the share price increases. Your profits or losses will be realised once you close your position on both your long and short trades.

5. Select the Trade Size

CFDs are traded in standardised contracts or lots, so you have to choose the number of contracts you want to trade. The size of an individual contract depends on the underlying asset being traded. For instance, with equity trades, one CFD is equal to one share but with other instruments like indices, forex, and commodities, the value of one CFD varies.

6. Apply Risk
Management Orders

Using take-profit and stop-loss orders is one of the key risk management techniques you should have in your CFD trading arsenal.

A take-profit or limit order will help to lock in profits by closing out a trade at a price that is better than the current market level. This order is especially great for securing profits in volatile markets.

A stop-loss order allows you to automatically close an open position once it reaches a specific level at a price below the current market level. It’s triggered by losing trades to help minimise losses when the market moves against you. There are various types of stop orders:

  • Basic stop: Closes out a position as near as possible to the price level you choose. High volatility and gapping (when an instrument opens above or below the previous day’s closing value without any trading activity in between) may affect the basic stop.

  • Guaranteed stop: Closes at the exact level you specify even when there is gapping. This stop incurs a small fee which you only pay when the order is triggered.

  • Trailing stop: Moves with your position in a favourable market but locks in your gains as soon as the market starts to move against you.

7. Monitor and
Close the Trade

After placing your trade and orders, you can track market prices in real-time. You can also open new trades and close existing ones. To close a trade, you do the opposite of what you did when you opened the position. For instance, a sell position of 100 gold contracts will be closed by buying 100 gold contracts. When you close a trade, your account will reflect the net profit or loss.

How is the Profit or Loss Calculated?

To calculate how much you can earn or lose from a CFD trade, you multiply the total number of contracts by the value of each contract. This figure is then multiplied by the difference between the price when you opened the position and the price when you closed it.

For example, let’s say you believe the value of the FTSE 100 will go down and you sell 40 FTSE 100 contracts when the price is 5,366.0. One FTSE contract is equivalent to $10 per point, so with 40 contracts, each point downward would make $400 and each point upwards would result in a loss of $400.

If you decide to buy the FTSE 100 when it’s trading at 5,358.0, your profit would be $3,200 (40 x 10 x [5,366 – 5,358]). If your prediction is wrong and the value of the FTSE 100 actually increases to, for instance, 5,375.0, your loss would be $3,600 (40 x 10 x [5,375 – 5,366]).

This loss or gain will be before incorporating the cost of trading. To get a more accurate idea of how much you will potentially make or lose, you also need to subtract any charges or fees you incur when you trade including the spread, commissions, or a small premium when you use guaranteed stops.

What is the Cost of
Trading CFDs?

How much you end up paying for each trade depends on the instrument you choose to trade. This is because each instrument has different liquidity and this determines how easy the instrument is to sell relative to other instruments. However, the cost of CFD trading is generally lower than other types of investments.

In most cases, you pay a commission when you trade equity CFDs and a spread for all the other markets. The spread is the difference between the buy and sell prices of the CFD. You also have to consider the interest fee charged for keeping a position open overnight and the cost of any additional tools you may need to use as you trade.

Why is CFD Trading
Considered Very Risky?

Like with other investments, CFDs come with both benefits and drawbacks. CFDs are a leveraged product and the biggest risk when it comes to CFD trading is the margin and high level of leverage available to traders. Both leverage and margin lower the cost of entry into the market, making CFD trading an attractive investment choice.

However, the initial margin and leverage can multiply relatively small moves. This means they can amplify losses the same way they multiply gains. The losses can even be amplified to a point where they end up exceeding your deposit, making your balance drop below zero (negative account balance). This risk is even higher in volatile markets. This is why it’s prudent to choose a broker that offers a negative balance protection policy.

Is Trading CFDs for Everyone?

Anyone can trade CFDs but that doesn’t mean everyone should. CFD trading can provide many benefits, especially the ability to trade on thousands of markets with little capital. Nonetheless, due to its intricacy, CFD trading is more suited to disciplined traders with sound risk management strategies and good practice using leverage and margin requirements correctly.

Getting Started with CFD Trading

Trading CFDs should not be taken lightly. Going into CFD trading with the hope of getting rich quickly is dangerous and that attitude may see you lose capital in little time. Thousands of traders trade CFDs in Australia and many of them have managed to find success in the markets. What separates those who succeed from those who don’t is taking the right approach to trading. There’s no guaranteed formula for success, you need a lot of discipline, stamina, and practice that can take many years to perfect.

Start Trading with a Demo Account

If you do not have much trading experience Many CFD providers have a demo account where you can ‘test drive’ their online trading platform without making a deposit. These demo accounts are also useful for testing your CFD trading strategies, before opening a live account.

Click here to open a Demo Account and Trade CFDs with FP Markets

Source - database | Page ID - 929

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