CFD Trading

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1. What is CFD Trading?

CFDs are ‘over-the-counter’ (OTC) derivative contracts. This means that they are created and traded off-market between parties rather than on an exchange, such as a stock exchange or futures exchange.

CFDs are OTC derivative contracts which are negotiated and entered into between you on one hand and your CFD Broker as principal on the other hand. Under a CFD, you and your CFD Broker each agree to pay the other the difference arising from movements in the value of an Underlying Product. This is a counterparty relationship which means that any positions you choose to open with your CFD Broker can only be Closed Out with your CFD Broker. Your Trading Account will either be credited or debited according to the profit or loss of that trade.
CFDs are available in the following Underlying Products:
Trading in CFDs does not result in the ownership by you in the Underlying Product and you will have none of the rights of an owner in that Underlying Product.



Take advantage of short to medium term price fluctuations with low cost CFD trading.


Hedge your portfolio against bearish moves in assets or reduce your exposure to currency risk. Go short share CFDs to protect individual holdings or go short share indices to hedge broad market exposure.

2. Types of CFDs

CFD Brokers offer Share CFDs, Index CFDs and Expiring CFDs. Not all CFD Brokers or platforms have Share CFDs, for example, you cannot trade Share CFDs on MT4. TradeWise will help you select the correct CFD Broker for your chosen trading products.



You can enter into CFDs based on shares listed on international exchanges. These CFDs are referred to as Share CFDs. Share CFDs derive their price from real-time fluctuations in the exchange-traded price of the Underlying Security on which the Share CFDs are based. For example, if you bought 1000 Share CFDs and the price of the Underlying Security was quoted as 25.70/25.71 then the Share CFDs would have a “notional value” or “contract value” of $25,710 (being 25.71 x 1000). This example is provided included for illustrative purposes only. Prices for Share CFDs are only quoted and can only be traded during the open market hours of the relevant exchange on which the Underlying Security is traded. Open hours of the relevant exchanges are available by viewing the relevant exchange websites.



You can enter into CFDs on many world indices. These CFDs are referred to as Index CFDs. Index CFDs derive their price or value from the real time fluctuations in the value of an Underlying Index as calculated by the relevant exchange or your CFD Brokers valuation of that Underlying Index. For example, if the level of the ASX S&P 200 is 5000 then trading 10 Index CFDs would mean the “notional value” or “contract value” of the trade would be $50,000. Similar to Share CFDs, prices are only quoted for Index CFDs and can only be traded during the open market hours of the relevant exchange on which the Underlying Index is determined. Open hours of the relevant exchanges are available by viewing the relevant exchange websites. Index CFDs allow you to trade anticipated market trends rather than individual shares or commodities. Most CFD Brokers offer Index CFDs on the majority of major market indices.



You can enter into CFDs over futures on many traded physical commodities, bonds and interest rates. These CFDs are referred to as Expiring CFDs. Expiring CFDs derive their value from fluctuations in the value of the relevant Underlying Commodity, Underlying Bond or Underlying Interest Rate as calculated by your CFD Broker from time to time. Your CFD Broker will generally calculate the value of the Underlying Commodity, Underlying Bond or Underlying Interest Rate for an Expiring CFD by reference to publicly available Pricing Sources, such as futures markets or cash indices published on the relevant Trading Platforms. The Underlying Commodities, Underlying Bonds or Underlying Interest Rates on which you can enter into an Expiring CFD will differ depending on which Trading Platform or CFD Broker you use.


There are thought to be two models or ways of trading Stock CFDs. The first is via what is commonly known as, the Direct Market Access (DMA) Model. The second is via what is commonly known as, the Market Made Model. The terms, however, are a misnomer as all CFDs are Market Made by your CFD Broker by the very nature of being an OTC product. DMA versus Market Made is simply a reference as to how your CFD Broker handles your transaction i.e. do they hedge your trade on an exchange or do they warehouse your trade on the brokers own book. Our experience would suggest that brokers who offset you trade on an exchange have given better pricing, but in reality, even DMA CFD providers may still choose to act as counterparty to your trading, as opposed to offsetting their risk on your position through their liquidity supplier, prime broker or exchange, particularly if you have a history of being an unprofitable trader.



Under the DMA Model, all CFD quotes will be the same as the price or value of the Underlying Product on the relevant exchange i.e. your CFD Broker will not apply any spread to prices or values of CFDs. The spread is the difference between the bid price and the offer price. Under this model, you will see your buy and sell orders appear directly on the underlying stocks exchange as your CFD Broker hedges your trade.



Under the Market Made Model all Stock CFD quotes made by your CFD Broker are with direct reference to the price or value of the Underlying Product on the relevant exchange but an additional spread may be applied to the price or value of the CFDs. The value of the spread will be determined by your CFD Broker in its sole discretion. Under this model, the CFD Broker will typically take on the risk of your trade, as opposed to hedging your trade through its prime broker or directly with the exchange.


Straight Through Processing (STP), Dealing Desk, A-Book and B-Book are terms used commonly by CFD Brokers and Educators. For your benefit these terms are described below:



Straight Through Processing (STP) refers to the way your orders are routed by your CFD Broker. A CFD Broker is said to be STP when your order is routed directly through to the liquidity venue, which could include your CFD Broker directly if they are warehousing your trade, the CFD Brokers liquidity supplier or prime broker or the exchange. The trading process is fully automated and your will receive very fast fills on your order. Almost all CFD Brokers today are STP, even ones that previously were known for running a Dealing Desk like CMC Markets.



A CFD Broker is said to be running a Dealing Desk if they assess your order before providing you with a fill on your trade in order to try to receive a better price for themselves. Brokers that used to provide requotes on your orders were said to be running a dealing desk. Today the order process is typically fully automated so your CFD Broker will have already assessed or be in the processing of assessing your trading behaviour to determine whether you belong on an A-Book or a B-Book and your orders will typically be filled very quickly with no requotes through almost all CFD Brokers.



Most CFD Brokers run an A-Book and a B-Book and the CFD Broker will switch their clients from one book to the other depending on the trade size, trading results, internal policies or the CFD Brokers view on the market. A trader who a CFD Broker has allocated to their A-Book is typically either a large trader or a profitable trader. A CFD Broker will hedge the trades of a trader who is on their A-Book with their liquidity supplier, who in turn may hedge the trade with their prime broker or directly on an exchange if the Underlying is an Exchange Traded instrument like a Stock or Bond or the Interbank market if a Currency CFD. This may seem like an advantage but it might not be as the time it takes to fill your order, known as latency will often be longer, maybe only by milliseconds than if you are on a CFD Brokers B-Book.



If you are on a CFD Brokers B-Book the broker is warehousing your trade. This could be to offset your trade via their internal order book or to take the opposite side of your trade, particularly if you have an unprofitable trading history. It is unlikely you will know if you are on a CFD Brokers A-Book or B-Book and in reality, there are often advantages to being on a CFD Brokers B-Book as the latency on your orders will be lower, resulting in faster fills. Latency Arbitrage strategies, which brokers typically term Toxic Flow will generally only succeed when the client is receiving fast fills on a brokers B-Book, and will fail miserably when the broker switches the client to their A-Book. Brokers spend a lot of time and effort in identifying Latency Arbitrage trading, and if you are lucky enough to generate profits from this activity the CFD Broker will most likely identify you as being a “Toxic Trader” and switch you to their A-Book, often automatically. The CFD Broker will typically have clauses written into their Client Service Agreement, which prohibit this type of activity so you will be blacklisted from that broker, your profits will not be paid out and quite likely you will keep your losses, but if you trade “normal” strategies, like the ones TradeWise will teach you that don’t require low latency it matters little whether you are on a broker A-Book or B-Book.


The key features of CFDs are as follows:



A CFD broadly replicates the price movement of the Underlying Product i.e. if the price of the Underlying Product changes, so too will the value of the CFD.



Exchange Traded CFDs like stocks and futures are a trading solution that provides the opportunity to profit (or incur a loss) by dealing in the Underlying Security without having to actually own the Underlying Security. This is unlike trading in the Underlying Security itself where you acquire a beneficial interest in the actual Underlying Security, for example, the share. As the holder of a Share CFD, you do not have a beneficial interest in the Underlying Security and you have none of the rights of a shareholder, such as voting rights or any entitlements to dividends or other distributions which may be paid to shareholders in respect of the Underlying Security. Your CFD Broker will credit your account with the equivalent dividend amount you would be entitled to as the owner of the stock.



Unlike contracts traded on an exchange, OTC products are not standardised. The terms of a CFD are individually tailored to the particular requirements of the parties involved in the contract i.e. you and your CFD Broker.



CFDs are OTC derivative products. CFDs are an agreement between you and your CFD Broker and can only be entered into and Closed Out with your CFD Broker.



A CFD broadly replicates the price movement of the Underlying Product i.e. if the price of the Underlying Product changes, so too will the value of the CFD.



CFDs are subject to Margin Requirements and are “marked to market”.



CFDs generally do not have an expiry date (unless the Underlying Product itself has an expiring date i.e. Expiring CFDs), and will remain in place until either you or your CFD Broker, in their sole discretion, Close Out the open position. Expiring CFDs will be Closed Out on the expiry date of the Underlying Product unless Closed Out by you or your CFD Broker, in their sole discretion, prior to that expiry date.

3. Take Both Long and Short Positions

With CFDs you can take either direction when entering a transaction or trade.

You can take both “long” and “short” CFD positions. If you take a long position (i.e. purchase CFDs), you profit from a rise in the price of the Underlying Product, and you lose if the price of the Underlying Product falls. Conversely, if you take a short position (i.e. sell CFDs), you profit from a fall in the price of the Underlying Product and lose if the Underlying Product’s price rises.

4. Calculating Profits and/or Losses:

The amount of any gross profit or loss made on a CFD Transaction will be equal to the difference between the value of the Underlying Product when the CFD is opened and the value of the Underlying Product when the CFD is Closed Out, multiplied by the number of the CFDs held. The value of the Underlying Product is determined by your CFD Broker by reference to the relevant Pricing Source. The calculation of profit or loss is also affected by fees and charges payable in respect of each CFD Transaction. There may be certain adjustments made in relation to the CFDs which may affect the calculation of profit or loss.


This example is included for illustrative purposes only, and is not indicative of actual exchange rates or values.


  1. You purchase 1,000 Share CFDs (i.e. you enter into a “long” CFD) where the Underlying Security is an ANZ share and the price at which you enter into the CFD is $32.71; and
  2. You later Closed Out the CFD by “selling” (or entering into a “short” CFD) at a higher price of $33.31.

The resulting gross profit on the transaction would be $600 being sale price ($33.31) less buy price ($32.71) x 1,000.

The net profit is determined after deducting commission, funding charges, transaction costs and any other charges.

The impact of fees on the net profit realised will be dependent on many factors and in particular, the length of time the open position was held as the funding charge is applied daily.

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5. CFD Trading Examples

We have described how CFD Transactions work and the basic points of CFD Trading.

One of the key advantages CFDs has over other financial instruments is that relatively small lot sizes can be traded – lot sizes can be as small as 1 unit (one share or one dollar per index point).

A CFD Contract is an agreement between two parties to make payments to each other based on changes in the value of one or more pre-agreed assets (Underlying Product), for example changes in a stock index, a commodity or an equity. The amounts you may have to pay, or the amounts you may receive, are calculated by reference to differences arising from movements in the value of the Underlying Product.

6. Key Benefits of CFD Products

CFDs provide a number of benefits which must be weighed against the risks of using them. The benefits of CFDs are as follows:


CFDs can be used to hedge your exposure to the Underlying Product.


You may take a view on a particular Underlying Product and invest in our CFDs according to this belief.


OTC contracts (such as the CFDs) are not standardised and can be personally tailored to suit your requirements. For example, your CFD Broker allows you to enter into CFDs in small amounts whereas exchange traded products have a minimum transaction size based on a dollar value.


CFDs do not require a rising market to make money. There is the potential for profit (and loss) in both rising and falling markets depending on the strategy you employ.


CFDs involve a high degree of leverage. CFDs enable you to outlay a relatively small amount (in the form of the Initial Margin) to secure an exposure to the movements in the value of the Underlying Product without having to pay the full price of actually acquiring the Underlying Product.


CFD Trading typically requires a much lower amount of starting capital than traditional stock brokerage accounts or futures, hence the huge popularity of CFDs as a trading product. The ability to micromanage position size also means you can use compounding strategies more efficiently if you have a profitable strategy.


Another big advantage of CFD Trading is that modern technology allows the automation of most tasks, from system development to copying other peoples trades, to order execution. With a little nouse, you can use powerful software programs to help you gain an edge in the market, and at the same time save huge amounts of time!


Literally, trade from anywhere! One of the greatest advantages of trading CFDs is the ability to trade from anywhere that has an internet connection. If you are one of the lucky few with the skills to make profitable trading decisions you can trade from home, work, a resort, the beach, a golf course, on the move… you get the idea.

7. Margin Obligations

CFDs are subject to margin obligations i.e. you must have sufficient balance in their Trading Account for security and margining purposes. You are responsible for meeting all margin payments required by your CFD Broker.


There are two components of the Margin Requirements which you may be required to pay in connection with CFDs; Initial Margin and the Variation Margin.


In order to enter into a CFD Transaction you will be required to pay your CFD Broker the Initial Margin or have an amount of Net Free Equity in your Trading Account that is at least equal to the Initial Margin. This amount represents collateral for your exposure under the transaction and covers the risk your CFD Broker takes on you.

Depending on the particular CFD Transaction, the market volatility for the Underlying Product and the Trading Platform you use, the Initial Margin for a CFD Transaction will typically be between 1% and 30% of the face value or contract value of the CFD Transaction. However, it is not uncommon for Initial Margins to be above this range.

Margin Requirements differ depending on the Trading Platform you choose. In choosing a Trading Platform, you should carefully consider the Margin Requirements of each Trading Platform as Margin Calls could have an adverse impact on your investment.

Your CFD Broker may, in their sole discretion and without the need to notify you, change the percentage Margin Requirements for a CFD Contract from to time. You should refer to the Initial Margin schedule on your Trading Platform for more information about the Margin Requirements each time you enter into a CFD Transaction.


As the value of your CFD will constantly change due to changing values of the Underlying Product, the Margin Requirement (being the minimum Trading Account balance you must maintain in order for your CFD Broker not to Close Out some or all of your CFD Transactions) on the open positions will also constantly change. This is also commonly referred to as a Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform.

Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient “Net Free Equity” in your Trading Account). Your CFD Broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.

Your CFD Broker determines the Variation Margin for a CFD Transaction by reference to changes in the value of the Underlying Product. In other words, each contract is effectively “marked to market” on a real-time basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Product as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Product as determined by your CFD Broker in their sole discretion.

Your CFD Broker will attempt to provide you with notice of any adverse Variation Margin by making a Margin Call (via ‘pop-up’ screens or screen alerts on the Trading Platform).

It is your responsibility to monitor your Variation Margin obligations. Any notification of a Margin Call will be via a ‘pop up’ screen or screen alert which you will only receive notice of if you access your online Trading Account via your Trading Platform’s website. There may be instances where your CFD Broker does not provide you with a Margin Call notifying you of an obligation to meet a Variation Margin. This does not waive your obligation to meet that Variation Margin. If you fail to meet a Variation Margin your CFD Broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open CFD Transactions.

Margin Calls are made on a net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one CFD Transaction can be used or applied as Initial Margin or Variation Margin for another CFD Transaction.



Margin Calls are generally notified to you using ‘pop-up’ screens or screen alerts on your CFD Brokers Trading Platform. You are required to log into the Trading Platform regularly when you have open positions to ensure you receive notification of any Margin Calls. Often your CFD Broker will also e-mail you a notification in addition to providing a pop-up. However, your CFD Broker is under no obligation to contact you in the event of any change to the Margin Requirements or any actual or potential shortfalls in your Trading Account.


If you do not meet Margin Calls immediately, some or all of your positions may be Closed Out by your CFD Broker without further reference to you.

Your CFD Broker generally applies risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your CFD Broker may Close Out some or all of your open CFD Transactions without notice to you.

The Default Liquidation Threshold is determined by the CFD Broker for your Trading Platform. It is implemented for risk management purposes, and may be varied by the CFD Broker at any time.

If you fail to meet a Margin Call, then your CFD Broker may in their absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open CFD Transactions and deduct the resulting realised loss from your Trading Account. You may be required to provide additional funds to your CFD Broker if the balance of your Trading Account is insufficient to cover these losses. If a Close Out occurs you will not be able to enter into another CFD Transaction until you transfer additional funds to your CFD Broker.

8. Risks of Trading in CFDs



Trading in CFDs involves a high degree of risk. It is important that you carefully consider whether trading CFDs are appropriate for you in light of your investment objectives, financial situation and needs. If there is an adverse change in the price, value or level of the Underlying Product, you will be required to immediately transfer additional funds to your CFD Broker in order to maintain your position i.e. to ‘top up’ your Trading Account balance. If you fail to provide those additional funds immediately, your CFD Broker may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following that closure. This shortfall may, in some instances, be substantial if there is a significant market event and gapping price action.


The following is a description of some of the other significant risks associated with trading CFDs.



If you incorrectly place your intended order you are responsible for the result of the incorrectly placed order, including all costs to close out the position and any resulting profit or loss on the outcome.



Your CFD Broker has absolute discretion to Close Out any open positions at values they determine. The effect of your broker exercising their discretion is that they may Close Out your open position and you may suffer loss as a result (including actual loss or opportunity loss if the value improves from the value the open position was Closed Out). Your broker is not responsible for any such loss.



When you place an order (i.e. request to open or Close Out a position), your CFD Broker has an absolute discretion whether or not to accept and execute such request. The effect of your broker’s discretion is that an order you give may not be executed and you may suffer loss (whether it be actual loss or an opportunity loss) as a result. Your CFD Broker is not responsible for such loss.


Stop Losses:

Stop loss orders are often used to attempt to limit or minimise the amount which can be lost on an open CFD Transaction. Stop loss orders may not always be filled and, in any event, may not limit your losses to the amounts specified in the order.



Under certain market conditions it could become difficult or impossible to manage the risk of open positions by entering into opposite positions in another contract or to Close Out an existing position. Market conditions may also mean that the price of CFDs may not maintain their usual relationship with the value of the Underlying Product. These circumstances could be pre-market pricing, settlement, corporate actions and price anomalies not related to standard price action.



In instances where you trade in a CFD based on an Underlying Product priced in a currency other than the nominated currency of your Trading Account, your profit or loss will be determined by movements in the price of the Underlying Product and also by the impact of movements in the exchange rate. Adverse foreign exchange rate movements could cause you to incur significant losses (or profits).



You will take on credit exposure from your CFD Broker in respect of your CFD Transactions. If the CFD Broker fails to perform its obligations your CFD Brokers obligations to you for your corresponding CFD Transaction will be reduced accordingly. If the CFD Broker becomes insolvent, you might lose some or all of the balance of your Trading Account. You also might face considerable delays before you are able to access the amount (if any) that is able to be recovered from the CFD Broker. Therefore, you should make your own assessment of your CFD Brokers ability to perform their obligations under the CFD Transaction.


Your CFD Broker may have the right to decide to make an adjustment in a number of circumstances if they consider an adjustment is appropriate. The CFD Broker will have a discretion to determine the extent of the adjustment so as to place the parties substantially in the same economic position they would have been in had the event giving rise to the need for the adjustment not occurred. Your CFD Broker may elect to vary or Close Out a position if an adjustment event occurs for example, if the sponsor of the Index ceases to calculate the index; a Underlying Security is the subject of a takeover offer or corporate actions are taken in respect of an Underlying Security.


Given you are dealing with the CFD Broker on every CFD Transaction, you will have an exposure to them in relation to each of those CFD Transactions. You should review the CFD Brokers financial accounts to assess their ability to meet their financial obligations.


There are a number of risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:


Risks related to the use of software and/or telecommunications systems such as software errors and bugs;


Delays in telecommunications systems;


Interrupted service;


Data supply errors; and


Faults or inaccuracies and security breaches.

A disruption to a Trading Platform could mean you are unable to trade in CFD Contracts and you may suffer a financial loss or an opportunity loss as a result.

9. Styles of CFD Trading

Today CFD Traders have the ability to create income from CFD Trading in a number of ways ranging from active to passive.


Discretionary Trading can be an active approach to trading CFDs. It involves making your own decision about the direction the underlying security might take and placing orders via your online platform manually (in general) in an attempt to profit from short term price fluctuations. This is an active approach to trading that is very hands-on and involves monitoring the markets on an intraday, daily or weekly basis. The advantage of Discretionary Trading is that the human brain can assess the impact of variables outside the data made available to a computer program, such as qualitative analysis of fundamental data, external data sources like bank economic forecasts and last, but not least the superior capability of the human brain when it comes to pattern recognition. The disadvantage of discretionary trading is the impact of fear, greed, and ego on the decision-making process, meaning even discretionary traders can benefit from a set of guidelines covering trade setups and risk management.


Hybrid approaches to trading can also be utilised for CFD Trading, and possibly with more success than each style of trading on its own. This can include making an assessment on an underlying securities fundamental conditions based upon fundamental research, valuations and forecasts from economists, Commitment of Trader (COT) reports, sentiment or other external information and then utilising a suitable type of trading system to enter and exit the market automatically according to your view. For example say you expect the stock market to crash you might choose a trading system that only trades the short side of the market until your view is realised, then you’d switch it off. The other advantage is if your view does not materialise utilising a trading system might result is smaller losses than simply being married to a particular view and holding onto losses in that CFD contract.


Also known as Algorithmic Trading, RoboTrading and Autotrading. Systems Trading involves the use of a computer program, which makes the buy and sell decisions based upon price action, technical indicators or quantitative analysis. The advantage, if you can find a reliable trading system is that you can automate the trading on your account and the computer will monitor the markets placing orders on your behalf, which means you can devote more time to research or other endeavours. The disadvantage of trading systems is that their success rate is not high, and they’re subject to technology risks so require oversight.


Perhaps the most passive form of CFD Trading is known as Copy Trading or Mirror Trading. Copy Trading is the process of finding other traders with a track record and following their trades automatically on your account. Essentially you become your own portfolio manager and select a variety of traders to copy on your account. Copy Trading services allow you to view the track record of other traders and if you’d like to follow a trader simply click Copy on the desired strategy, enter your account number and the trades will be automatically copied into your account. You can start and stop copy trading at any time.