5 Surprisingly Useful Ways to CFD Trading
CFDs (Contracts for difference) have quickly become one of the preferred ways for speculators in the financial market to trade. Why?
- Are easy to access with limited starting capital.
- Have inbuilt leverage (meaning you can take trades greater than the value of your account size – perfect for short-term trading).
- Are available in a variety of global markets meaning you can diversify your trading strategies across uncorrelated instruments.
But for the savvy trader, CFDs can be used as outside the box solutions for several common trading problems, or to implement more advanced strategies.
What is a CFD?
A contract for difference (or CFD) allows you to trade a stock, index or commodity without owning it. When you trade a CFD, you simply make (or lose) the difference between the price you bought it at, and the price you sell it at.
For all intents and purposes, it is very similar to trading the stock, index or commodity direct, apart from some technical differences.
One of the less appreciated benefits of using CFDs is that they allow you to trade at a smaller size.
Why is this so helpful?
Not only does this let you trade on a smaller account in general, it allows you to be much more accurate in your position sizing no matter what size you’re trading.
For example, if you were to trade the S&P500 e-mini futures contract, the contract trades in $50 increments. In contrast, the CFD trades in $1 increments. The smaller contract size provides you with a much greater degree of risk control than its larger cousin.
Scale out of your trades
The smaller position size also has the great benefit of allowing you to scale out of your positions.
Because of the small minimum position size, you can split your trade into several positions (three is recommended) rather than one, and close them at separate points.
This allows you to take some profit when the market makes it available, take some more at your target, and leave some skin in the game for a big win.
Hedge your stock portfolio (and earn interest!)
Think the market is going to head down, but don’t want to sell your stocks?
Going “short” a CFD index might be just the thing for you.
By shorting a CFD, you benefit as the price of the index goes down (and lose when the index goes up), so the profits in the CFD can offset some or all of the associated losses in your stocks.
There are several reasons you may want to take this approach
- You have a view that the stock market is likely to fall
- You don’t want to sell your stocks because of capital gains tax
- You think there will be a temporary correction and want some short-term protection
The additional benefit of being “short” a CFD is you can earn interest. When you are long a CFD, you pay interest (due to their leveraged nature). When you are short, you are on the other side of the trade, so can earn rather than pay.
Trade in the evening
CFDs provide you with access to global markets that trade 24 hours a day (expect on weekends).
The beauty of this is that you can fit your trading into your schedule. Have a day job? No sweat. You can choose a market that is active during your evening.
For example, if you are Australian based, you could look to trade the UK market index (FTSE100), which is active after you finish work for the day.
Making sure trading fits nicely into your schedule is very important. If you don’t balance your lifestyle with your trading, then you will find it difficult to trade consistently.
Gain tax benefits
Depending on your location, CFDs can be tax efficient.
If you lose when trading with CFDs, they are generally tax deductible. This means you can offset your losses against your income, in order to reduce your tax obligation, or even receive a refund in certain circumstances.
Of course, you don’t want to trade to lose in order to gain the tax benefits, but even the best traders don’t win all the time. Saving some tax when things are not going so well is a nice little perk.
Trade the flexible way
Trading CFDs is beneficial in more ways than just ease of access with limited starting captial, leverage, and the ability to trade global markets. You will also greatly increase the flexibility of your trading approach.
You will have the tools to:
- Trade smaller with improved position sizing
- Scale out of your trades
- Hedge your stock portfolio
- Fit your trading approach to your schedule
Ready to trade CFDs? You can check out our low-cost non-dealing desk trading account today.
To find out more about Pepperstone's Index CFDs including the indices available, session times and margin requirements, click here.