Trading CFDs When Markets Are Dominated by Fear

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Top Broker!
    Best Choice For Beginners!
    Free Trading Education!
    Free Demo Account!
    Big Sign-up Bonus!

  • BINOMO
    BINOMO

    Perfect For Experienced Traders!

Trade War Fears To Dominate Market Moves This Week

Intense G7 meeting
After imposing tariffs on steel and aluminum imports on its closest allies, the U.S. will be facing enormous criticism at the G7 summit on Friday in Quebec or, as the French Finance Minister Bruno Le Maire likes to call it, “G6 plus one.”

When you’re almost 800 Billion Dollars a year down on Trade, you can’t lose a Trade War! The U.S. has been ripped off by other countries for years on Trade, time to get smart!” Donald Trump

Whether President Trump is playing a smart strategic game or is seriously considering getting into a trade war remains unknown, but the probability of a full-blown trade war has undoubtedly increased significantly.

The summit is due to take place after the U.S. and China trade negotiations ended on Sunday without any significant progress made. In fact, China warned the U.S. that any move to implement tariffs on Chinese products would ruin the negotiations.

Although markets in Asia are rallying after the U.S employment report released on Friday showed a robust surge in numbers and new elections were avoided in Italy, this optimism will soon disappear if the Trump administration pulls the trigger on the threatened tariffs on $50bn worth of Chinese exports. So, keep a close eye on Trump’s Twitter account for updates.

Europe’s Politics and data to be in focus
The Euro struggled last week, with Italian and Spanish political turmoil sending the single currency to its lowest levels since July 2020. The compromise reached between the Italian President and the populist coalition prevented further losses as a new election seems to be off the cards for now. This relief was reflected in Italian bonds where 2-Year yields fell 200 basis points from Tuesday’s high. However, the Euro’s recovery may be short-lived if the new Italian government moves ahead with its proposed massive spending agenda and tax reductions. These actions will not only create conflict with Brussels but will also invite credit rating agencies to cut their debt ratings.

On the data front, the Eurozone Services PMI is likely to confirm that the economy continued to slow down as it entered Q2. Another round of negative economic releases will lead the ECB to postpone ending QE and thus drag the Euro further. The UK services PMI , Germany’s industrial production and factory orders will also be in focus this week.

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

How a CFD trade works in terms of fees and commissions

Contracts for difference (CFDs) are a near-perfect route into the markets for those who wish to trade financial assets rather than own them. Each CFD is, as the name suggests, a contract between the trader and CFD provider, usually, a broker.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Top Broker!
    Best Choice For Beginners!
    Free Trading Education!
    Free Demo Account!
    Big Sign-up Bonus!

  • BINOMO
    BINOMO

    Perfect For Experienced Traders!

The trader takes a view on whether the asset in question – a share, a currency, an index or anything else – will rise or fall in value over a certain period. The broker, essentially, stands on the other side of the trade. At the end of the contract period, one party – whichever made the best judgment as to the direction of the price – will receive from the other the difference between the opening and closing price.

As the trader never owned the capital asset, how can any gain be taxed? But less well-understood is how CFD trading is paid for. Are there fees. Are there commissions? What should a novice CFD trader look out for?

Spreads and fees

The first thing to bear in mind is that the answers to these questions vary enormously, across brokers, across different markets and in relation to different assets.

In some cases, there are no charges at all for day trading, with the broker making its profit solely on the difference between the buying and selling price – the “spread”.

More on that in a moment.

The most obvious is a commission or fee on the value of the underlying security being traded. The size of this can vary a lot, from 0.1% to perhaps 0.3%, or more. Fortunately, this is a very competitive market, so the ability of brokers to charge steep commissions is severely limited.

If a commission is charged, it will usually apply to all instruments, including the trading of indices.

The second way in which traders pay a broker is through the spread, as mentioned earlier. This difference between buying and selling prices means, in effect, that a trader’s position has to move a number of points in what is, from the trader’s point of view, the “right” direction before they could even sell the contract back for the price they had paid.

Overnight charge

When a broker both charges commission and operates a spread, the trader needs to take full account of both because it is in the interplay of the two that most of the real cost of the trade will be found. Low commission may disguise wide spreads, and vice versa. The total cost is the important figure.

One charge common to all CFD brokers comes into play when a position is left open overnight, even if it is opened a few minutes before midnight and closed a few minutes after. This “overnight premium” usually varies from one asset to another and is normally set at a pre-agreed level above a benchmark such as the London Inter Bank Offered Rate (LIBOR), typically about 2%.

As to why this overnight premium is levied, the answer is that a CFD, being a derivative, allows traders to take a position while paying only a small fraction of the value of the underlying security. In effect, the CFD trader is trading on margin, thus an interest rate is payable.

Coronavirus affects markets

Obviously, this premium is not charged when the trader closes out their position by the end of the day’s trading.

One of the less well-known benefits of CFD trading is that, while it does not give the trader the voting rights enjoyed by a shareholder, it does usually entitle them to enjoy a benefit when the underlying share pays a dividend.

Thus, most CFD providers will make a “dividend adjustment” to the trader’s account. For those holding a long position in the stock concerned, this is good news, because the adjustment will, typically, be equivalent to about 90% of the value of the dividend.

Unfortunately, for those taking a short position, their account will be adjusted downwards, usually to the value of 100% of the dividend.

This is, in effect, another charge, but only for those of a bearish disposition!

A transparent charging structure

What other costs may there be? Sometimes, the broker’s bank may charge a small fee when the broker despatches funds to the client’s account. Furthermore, the trader’s credit-card issuer may make charges for the deposits required of CFD traders when they open a trading account.

Earlier, we mentioned that some CFD brokers charge no commission at all, making their money solely from the spread between the buy and sell price. CFD providers that do charge commission may object that charging by spread alone may disguise a higher cost of trading than charging by commission, as the width of the spread may be less obvious than the upfront charge, certainly to a novice trader.

This argument does not really stand up. CFD providers will give details of both any commission and any spreads. Traders, even fledgling ones, will need to take account of either or both.

Which takes us to one final point. CFD trading costs are not merely transparent, they are sometimes lower than those that would be faced by someone trading the actual underlying instruments. However, for larger orders it would normally make more sense to trade the actual instrument in question.

To sum up, in order to make sure that CFD traders are choosing the right trading platform for their needs they should look at all costs in the round and select their CFD provider accordingly.

What is a contract for difference?

A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and treasuries.

CFD trading explained

Some of the benefits of CFD trading are that you can trade on margin, and you can go short (sell) if you think prices will go down or go long (buy) if you think prices will rise. CFDs are tax efficient in the UK, meaning there is no stamp duty to pay*. You can also use CFD trades to hedge an existing physical portfolio.

Introduction to CFD trading: how does CFD trading work?

With CFD trading, you don’t buy or sell the underlying asset (for example a physical share, currency pair or commodity). You buy or sell a number of units for a particular instrument depending on whether you think prices will go up or down. We offer CFDs on a wide range of global markets and our CFD instruments includes shares, treasuries, currency pairs, commodities and stock indices such as the UK 100, which aggregates the price movements of all the stocks listed on the FTSE 100.

For every point the price of the instrument moves in your favour, you gain multiples of the number of CFD units you have bought or sold. For every point the price moves against you, you will make a loss.

Open a live account

Unlock our full range of products and trading tools with a live account.

Free demo account

Practise trading risk-free with virtual funds on our Next Generation platform.

What is margin and leverage?

CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position. This is called ‘trading on margin’ (or margin requirement). While trading on margin allows you to magnify your returns, your losses will also be magnified as they are based on the full value of the CFD position.

What are the costs of CFD trading?

Spread: When trading CFDs you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favour before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.

Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.

Market data fees: to trade or view our price data for share CFDs, you must activate the relevant market data subscription for which a fee will be charged. View our market data fees

Commission (only applicable for shares): you must also pay a separate commission charge when you trade share CFDs. Commission on UK-based shares on our CFD platform starts from 0.10% of the full exposure of the position, and there is a minimum commission charge of £9. View the examples below to see how to calculate commissions on share CFDs.

Please note: CFD trades incur a commission charge when the trade is opened as well as when it is closed. The above calculation can be applied for a closing trade; the only difference is that you use the exit price rather than the entry price.

What instruments can I trade?

When you trade CFDs with us, you can take a position on over 10,000 CFD instruments. Our spreads start from 0.7 points on forex pairs including EUR/USD and AUD/USD. You can also trade the UK 100 and Germany 30 from 1 point and Gold from 0.3 points. See our range of markets

Free demo account

Practise trading risk-free with virtual funds on our Next Generation platform.

Example of a CFD trade

Buying a company share in a rising market (going long)

In this example, UK Company ABC is trading at 98 / 100 (where 98pence is the sell price and 100pence is the buy price). The spread is 2.

You think the company’s price is going to go up so you decide to open a long position by buying 10,000 CFDs, or ‘units’ at 100 pence. A separate commission charge of £10 would be applied when you open the trade, as 0.10% of the trade size is £10 (10,000 units x 100p = £10,000 x 0.10%).

Company ABC has a margin rate of 3%, which means you only have to deposit 3% of the total value of the trade as position margin. Therefore, in this example your position margin will be £300 (10,000 units x 100p = £10,000 x 3%).

Remember that if the price moves against you, it’s possible to lose more than your margin of £300, as losses will be based on the full value of the position.

Outcome A: a profitable trade

Let’s assume your prediction was correct and the price rises over the next week to 110 / 112. You decide to close your buy trade by selling at 110 pence (the current sell price). Remember, commission is charged when you exit a trade too, so a charge of £11 would be applied when you close the trade, as 0.10% of the trade size is £11 (10,000 units x 110p = £11,000 x 0.10%).

The price has moved 10 pence in your favour, from 100 pence (the initial buy price or opening price) to 110 pence (the current sell price or closing price). Multiply this by the number of units you bought (10,000) to calculate your profit of £1000, then subtract the total commission charge (£10 at entry + £11 at exit = £21) which results in a total profit of £979.

Outcome B: a losing trade

Unfortunately, your prediction was wrong and the price of Company ABC drops over the next week to 93 / 95. You think the price is likely to continue dropping so, to limit your losses, you decide to sell at 93 pence (the current sell price) to close the trade. As commission is charged when you exit a trade too, a charge of £9.30 would apply, as 0.10% of the trade size is £9.30 (10,000 units x 93p = £9,300 x 0.10%).

The price has moved 7 pence against you, from 100 pence (the initial buy price) to 93 pence (the current sell price). Multiply this by the number of units you bought (10,000) to calculate your loss of £700, plus the total commission charge (£10 at entry + £9.30 at exit = £19.30) which results in a total loss of £719.30.

Short-selling CFDs in a falling market

CFD trading enables you to sell (short) an instrument if you believe it will fall in value, with the aim of profiting from the predicted downward price move. If your prediction turns out to be correct, you can buy the instrument back at a lower price to make a profit. If you are incorrect and the value rises, you will make a loss. This loss can exceed your deposits.

Hedging your physical portfolio with CFD trading

If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.

For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end and the value of your physical shares starts to rise again.

Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.

Attend one of our regular webinars or seminars and improve your CFD trading skills.

Test drive our trading platform with a practice account

Experience our powerful online platform with pattern recognition scanner, price alerts and module linking.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Top Broker!
    Best Choice For Beginners!
    Free Trading Education!
    Free Demo Account!
    Big Sign-up Bonus!

  • BINOMO
    BINOMO

    Perfect For Experienced Traders!

Like this post? Please share to your friends:
How To Choose Binary Options Broker 2020
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: