Challenging market conditions have made it a far more difficult task for investors to make gains on their trades. However, one of the few exceptions which offer the opportunity to actually make money from the downturn in the economy is contracts for difference, or CFDs as they are more commonly known.

Those who opt to trade from home are not always able to spend years learning the markets from those around them. This means that it is vital to identify the right kind of investment which will be able to provide a return even in unfavourable conditions without being overly complex or difficult to grasp.

Trade cfds have several advantages including providing any returns free of stamp duty* as well as not transferring the actual ownership of the commodity, thus making the trading far more straight forward. It also offers traders the opportunity to make a profit even in a falling market, by going both long or short.

CFDs are ideal for trading from home as there are no specialist tools or access required; all of the information needed can easily be obtained from a broker. It is also possible to select one of several markets including whole indices or individual components such as shares as well as commodities, currencies and bonds.

The ease with which information can be accessed means that trading CFDs from home is very straight forward, even on a part time or casual basis. Most brokers allow new traders to register online meaning that it is entirely plausible to have a live account within minutes of applying.

Once the broker has activated your account, you will need to deposit some money before you can start trading. Whilst you might not want to start with large amounts, each broker will have a minimum account balance you will need to begin trading. However, brokers understand that novices will not be keen to take big risks to start with and the vast majority set their minimum levels suitably low.

Although you are able to trade as soon as your account is credited with your funds, taking time to familiarise yourself with the services offered by the broker and how to navigate around the platform is highly recommended. You may find that your chosen broker offers additional facilities such as smartphone platforms for those who want to check their account whilst they are out and about.

Finally, any decent broker will offer customer service and support round the clock to ensure that just because you are trading from your home computer, you are not left to work out any problems on your own. Any reputable firm will provide either an email or telephone service which means you can trade at your convenience knowing that help is always at the end of your fingertips. * CFD trading is exempt from UK stamp duty. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.

Contracts for Difference are instruments you can trade that reflect the movements of assets underlying it. While allowing for losses or profits to be realized when underlying assets move in relation to positions taken, Contracts for Difference do not let the particular underlying asset be owned. In the simplest of terms, they are contracts between brokers and clients. There are many advantages to using Contracts of Difference but how successful you get also depends on obtaining the right CFD trading provider.

The advantages

A few of the benefits of Contracts for Difference include:

# Higher leverage - when compared with traditional trading, Contracts for Difference offer a higher leverage, usually beginning at 2% from the margin requirement. And with respect to the assets, the dpi can rise to 20%. Lower margins mean less capital outlays for investors and traders and greater potential returns.

# No borrowing stock or shorting rules - you sell short when the marketplace is down. Contracts for Difference don’t follow this, allowing for instruments to become shorted any time you want. Since no one actually owns the actual asset, there are no shorting or borrowing costs to be levied.

# One platform for global market access - most brokers for Contracts for Difference offer products in main markets on the planet. As such, it would be very easy to trade within any marketplace for so long as that marketplace is accessible from the broker’s platform.

# Professional services without fees - brokers for Contracts for Difference essentially are the same with traditional trading brokers but many CFD traders do not charge fees for trading CFD. For brokers that provide guaranteed stops, fees for the service are usually attained separately.

# No day trading requirements - other markets require that particular amounts of capital be met in order for day trade to happen. The marketplace for Contracts for Difference aren’t bound by these restrictions, with accounts often opened with less than $1000. The usual amounts though are between $2000 and $5000.

Interested in Contracts for Difference?

Then you need a broker. You can easily obtain a broker by going on the internet, with lots of sites available allowing you to compare various brokers in the region. Choose well so that you can get the most out of your efforts at taking advantage of an agreement for Difference. Look for brokers that are credible and also have wide-ranging resources. Search for the lowest opening balances required. Look for certifications to ensure the broker is operating legitimately. There’s nothing like throwing out your investment funds on the fraudulent broker.

Trading Contracts for Difference differs from other varieties of trading in the stock as well as Currency markets. The one thing that it has that is similar to many other conventional way of shares and share dealing is the fact that it brings in an income. Overall, however, it brings in a larger margin of profit compared to other contemporary way of trading. Instead of profiting by selling the particular shares and currencies, you profit by the modification within the prices of currencies and shares in CFD trading. Like a trading product, this type of trading is done on leverage only, and at usually, the leverage goes to 10:1 or even more as much as 20:1.

For novices, the simplest way to view and view the operation of the Trading Contracts for Difference would be to consider it as a way to magnify profits. Not only are they magnified, but they are real. For example, if you’re trading about the leverage of 20:1, and you invest say, about $10000, you will be bale to purchase as much as $200,000 worth of CFDs. When the shares rose in price by about $0.05, your profit would be $10,000 minus the costs. With respect to the leverage, your profits will be magnified through the same quantity of leverage. If you have chosen a CFD broker who trades both ways, you are able to make money from the falling and also the rising stock prices.

Unlike other share dealing practices, you can be able to trade on shorter periods with CFDs. This will permit you to make money from even the smallest moves in the prices of the stocks on the market. The shorter periods permit you more room to maneuver onto other profitable deals on the market.

For example, if you were trading on one stock for a month, it means that within that one month, you can only make money from the progresses prices of these particular stocks. Even so, had you been trading on the shorter lease; say like one week, you can shift your CFDs elsewhere in the other week.

Another difference between the CFDs and normal stock trading is you can be able to cut losses fast. Depending on the platform that you simply trade your CFD on, you can exit the trade within the same trading day when prices plummet. Within the normal stock trading, you’d most likely have to wait until the end during the day to determine if the prices will rise. Such could bring untold losses. All said and done, the major difference between the CFD and also the conventional stock trading is that the formers profits margins are bigger, which there is a way to count losses and re-locate fast.

The ascending triangle is a very well known chart pattern that has been used by many successful traders over the years. An ascending triangle is formed when the price action is contained within two lines. The top line is close to horizontal while the bottom line slopes up towards the top line.

Ascending Triangles, Easy To Trade

Most ascending triangles, in fact 63%, break out to the upside making this pattern very predictable. Around half (51%) of these breakouts are profitable and on average the profit per trade is 1.43% over a period of 10 days.

The high chance that the ascending triangle will break to the upside, together with some strong moves when the pattern does breakout, makes this pattern attractive to trade.

Refine Your Entries

A long breakout from an ascending triangle works better in a rising market which is clear from the poor performance in 2002 and 2008. Ensure the market is in a consolidation phase or an up trend prior to the breakout. Check the sector is in an up trend as well.

Ascending triangles that breakout near the point of the pattern produce inferior results. A breakout is better if it occurs before the pattern gets 90% of the way to the point of the pattern. Shallow patterns are also best avoided, where the pattern height is less than 2% when compared to the stock price.

Ascending triangles with two lows at the same price or two closes at the same price are also should be avoided, as this usually occurs in an illiquid stock. If the volume supports the breakout the results are better. Supportive volume means the volume on the way up is higher than the volume on the way down.

Ascending Triangles Are Very Profitable

You can improve your trading results by using a series of simple filters that have been outlined here. This select group of ascending triangles delivers an average profit of 1.83% in 10 days and is profitable on 58% of the trades. Overall this makes ascending triangles attractive to trade.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.

Which is better to trade CFDs or stocks? The answer to this question is not obvious and it will depend on what you want to get from trading. Looking at CFDs vs Stock we will highlight the key differences.

Cash, All or Nothing

It is normally necessary to have 100% of the cash available to purchase a stock. Even if you were to use a margin loan and borrow to invest you will still be required to front up with about 40% of the investment in cash.

With CFDs the amount of cash required is as low as 3% for stocks and even less if you are trading indices or currencies. The profit potential when trading CFDs is very large due to the leverage employed and can be 10 - 15 times that available when trading stocks.

When it comes to making the most of your capital CFDs win easily against stocks.

What Happens When It Doesn’t Work?

When using a large amount of leverage it is not only gains that can increase it is losses as well. When you are trading stocks the worst case scenario is 100% loss if you paid for the shares in cash.

It is possible to lose more than 100% of the money you invested in the first place with CFDs, so risk management is very important.

Trading stock gives a much greater control over risk than trading CFDs. The leverage involved with CFDs make risk much harder to manage as losses can become large very quickly.

What Does It Cost?

Brokerage and interest charges are the two main costs of trading when looking at CFDs vs stock.

When trading stock there will be no interest costs at all. CFDs attract interest charges on the whole position.

With lower brokerage rates on CFDs and higher interest bills it will ultimately come down to how long a position is held to determine the winner between CFDs vs stock.

Tax Free Profits?

One of the reasons that CFDs were originally developed was to get around stamp duty that was payable in the UK on stock purchases. CFDs were exempt from stamp duty.

Australian traders will notice a difference between CFDs vs Stock when it comes to tax. There are no franking credits attached to CFDs and the 12 month capital gain discount also does not apply. There are tax advantages to stocks in Australia.

Tax rules are considerably different between different countries so it is not possible to determine the winner here as it will depend on your country of residence.

CFDs vs Stock, The Winner Is

CFDs provide greater leverage which gives you an advantage if you can manage your risk well. If not Stocks are definitely easier to handle. Which of the two, CFDs vs stock is better is ultimately up to you.

Lower brokerage costs make CFDs a better proposition for the short term trader, but interest can have an impact if you hold positions for the longer term. I like trading CFDs because of the greater upside that is available and work to actively reduce the risk that is associated with the leverage.

Understanding the dividend process will help you to understand what happens if a stock goes ex dividend while you are holding it with a CFD.

When trading stock, there are three important dates in relation to dividends; the ex dividend date, the record date and the payment date. When you are trading CFDs, the only date that is important is the ex dividend date.

Trading Stocks For Dividends

Buying the stock before the ex dividend date will entitle you to receive the dividend. Buying the stock on the ex dividend date you will not receive the dividend.

The next date is the record date which is 3 trading days (on the ASX) after the ex dividend date. This is the date the investor must own the stock on to receive the dividend. Because it takes 3 days to settle a share that is purchased the ex dividend date and the record date are three days apart.

The final date is the payment date on which the dividend cheque is actually posted to the investor. There can be a significant delay from the record date to the payment date.

CFDs - Its All About The Ex Dividend Date

When you are trading Contracts for Difference (CFDs) the only date of any importance is the ex dividend date as all three dates that apply to stock investors blend into one.

If you have bought the Contract for Difference (CFD) then on the ex dividend date you receive a cash payment equivalent to the amount of the dividend.

When you are short selling CFDs you will have a payment taken out of your account on the ex dividend date that is equal to the amount of the dividend. These payments or deposits will be processed from your cash account by the CFD broker.

Zero Risk, Is That Possible

It may then seem that by buying a Contract for Difference (CFD) one day before the ex dividend date and selling it after the ex dividend date you have found a no risk trading opportunity as you are guaranteed to receive the dividend.

There is a problem with this strategy and that is the stock normally drops the amount of the dividend on the day it goes ex dividend, which would wipe out any gain made from the dividend payment.

Likewise it does not work to sell a Contract for Difference (CFD) before the ex dividend date, the drop in value on the ex dividend day will be offset by having cash removed from your account for the amount of the dividend.

Franking credits cannot be used if you are trading Contracts for Difference (CFDs) for dividends. Using CFDs eliminates some of the tax advantage of investing for dividends.

The Ex Dividend Date and CFDs

On the ex dividend date you would expect the stock to drop equal to the dividend payment. If you own a CFD you will get the dividend payment in cash. If you have sold a CFD and are short you will pay out the dividend amount in cash.

Interestingly, most CFDs do not trade on a Contracts for Difference market. The Australian Stock Exchange has created a market for CFDs but as at the end of 2008 the volume traded on the ASX CFD market represented only 1% of the total CFDs traded.

CFDs Traded Over The Counter

CFDs trade Over The Counter (OTC) which means that they are an agreement between you and the CFD provider. There is no formal CFD exchange, so to exit the position you must close the position with the same broker you entered the contract with. It is not possible to close the CFD with a different broker.

The prices that you can trade a CFD at are usually the same as the underlying market as the CFD brokers mirror the underlying market with their quotes.

Protecting The Position With A Hedge

While no formal Contracts for Difference market exists, other than the ASX CFD market, the CFD broker may, or may not trade the underlying instrument on the underlying market to protect the position they have taken with the individual trader. This is known as hedging a position.

If a trader was to buy 300 shares of BHP, the CFD broker could simultaneously buy 300 shares of BHP on the ASX market. By doing this any gain or loss made by the trader on the CFD position equals the gain or loss made by the CFD broker. The broker is said to be fully hedged.

If you choose to use Direct Market Access then the CFD provider fully hedges every position. If you are using the Market maker execution model then the CFD provider does not necessarily enter every trade and may instead hedge the total position.

No Guarantees With CFDs

The strength of your CFD broker is an important consideration as you must enter and exit your CFD trades with the same broker. When it comes time to take a nice profit you want to be sure your CFD broker is there to deliver it.

Most CFD brokers are large companies that are publicly traded so information on their financial strength is readily available. However not all companies are public and finding out the financial strength of those that are not may be more difficult.

CFD Market

The absence of a CFD market does not really affect traders at all. By placing orders with your CFD broker you are likely to trade at market prices and the order could even be executed in the physical market.

Trading a high probability trading strategy with CFDs is certainly attractive. This style of strategy is right very often, which makes it much easier to trade.

It is not necessary to endure long periods of losing trades, drawdown in account balances is less and the leverage of CFDs does not have the same impact on an account.

High probability trading strategies are not necessarily the right direction to focus on with your research.

Its Not About Being Right

It takes two numbers to gauge the performance of a trading strategy. The hit rate (how often the strategy is profitable) and the risk reward (wins relative to losses). It is the combination of these two factors that determine the effectiveness of the strategy.

Consider the following trading strategy that is profitable 95% of the time. The strategy wins $100 on each profitable trade, so from 100 trades the strategy makes $9,500 trades on average. But what happens on the other 5% of the trades.

If the average loss is $2,500 then the strategy loses $12,500 based on 5% of the 100 trades. Even though this strategy is right very often it still loses money. It is not one or the other measure in isolation, it is the combination of win% and the risk reward.

You Will Still Have Losses

Most high probability trading strategies rely on small profit targets and wide stop losses. FAP Turbo is one example of this a Forex trading robot that is right 95% of the time.

These strategies work very well up to the point where they experience very large losses. A tighter stop can be used to reduce the size of the loss. This however will usually reduce the win% and how often the strategy wins.

It Is All About Balance

Back testing can be used to determine the optimal balance between risk and reward and the win%. Try testing a variety of different stop loss levels to determine the best outcome for risk reward and win%.

In my personal testing around trading chart patterns I have found that the best trades go well from the start and do not look back. Tight stops can be used with a positive impact on the results of the strategy. I have also found that using profit targets limits gains and while it improves the overall win percentage it does not improve the overall profitability of the strategy.

Make Money First, Be Right Later

Strategies that follow the trend are not right very often and win about 30% of the trades. The wins are much bigger than the losses with a risk reward greater than 3. This combination produces a profitable strategy.

Scalping relies on a high win% usually 70% or more, but usually have a low risk reward where profits are equal to losses. This is another profitable strategy.

Successful trading is about making money, not about being right. Ensure the strategy you use is profitable overall. It is not just about getting a high probability trading strategy.

New traders may say that CFDs suck, but blaming CFDs for the fact you lost money is a very natural thing to do.

Losing money is not due to the use of CFDs (Contracts for Difference) it is the decisions that the trader made. It is very important as a trader that you take responsibility for your actions, both win and lose.

Leverage Is A Double Edged Sword

CFDs trade on leverage where a small amount of money down gives you access to a large position. This can result in very quick gains or losses as the market moves. If you lose money trading CFDs do not blame CFDs and say that CFDs suck.

Using stops on every trade is an important part of your risk management. If you do not use stops then you may not be ready to become a CFD trader.

The Broker Knows Where Your Stop Is

When trading CFDs the broker knows where your stop order is placed and some people believe CFDs suck because the broker can then target your stop. Once you are exited from the trade you then watch the market move the way you expected it to go in the first place. You lost money despite the fact that you were correct.

The brokers trade millions of dollars each day and it is not in their best interests to chase after traders stops. The more money you make the more you are likely to trade. I have had stops hit and then watched the market reverse and I have also seen the market very close to my stop loss before reversing. Good stop placement will minimise the number of false stop loss triggers.

All the traders in the market create the price movement and you are giving a CFD broker too much credit if you think they can move the market. Accept that you will be stopped out at times even if you have placed your stop correctly.

Ripped Off By Re-quotes

Many new traders trading shares also reckon that CFDs suck because their market maker broker re-quotes them a higher entry price when buying the CFDs. These re-quotes are delivered because there is insufficient volume at the level that the trader wishes to trade, or the market has moved rapidly from the current price.

The difference between the re-quote and the price you placed your order at is called slippage. This is accepted when buying stock as you may execute some of your order at one price and some at a higher price where there is sufficient volume. Your average price is then higher than your original order.

A market maker executes the whole order or nothing at all. They do not provide partial fills instead the broker provides a re-quote at a level that they can execute the complete order. Re-quotes are necessary for the orders to be executed in line with the underlying market and are not designed to rip traders off.

It Is Up To You

It is never the trading instrument that is the cause of bad performance it ultimately is the trader. There is no point in blaming the market, the broker, your partner or CFDs it comes down to your decisions.

If you never take responsibility for your results, you cannot change things. If you think the rest of the world is driving you crazy, you will have to send the rest of the world to a psychiatrist for you to get better. As a trader take full responsibility for the outcome of your trades, you can then change the outcome.

CFD finance is easy to understand if you can grasp the mechanics of trading Contracts for Difference. To enter a CFD position you must pay a small margin. The margin that you pay is insurance for the CFD provider against any loss you may make. The value of the margin varies each day as the value of the position changes. The margin money does not buy the underlying stock.

The CFD Broker then protects the position they hold by purchasing the underlying instrument and the cost of this is the full value of the position. The CFD broker is effectively lending you the money to buy the underlying instrument.

CFD Finance when Buying CFDs

The CFD provider will charge interest on the whole position that you enter. Interest is charged on the face value of the contract if you buy a CFD. The face value is the number of contracts multiplied by the current price.

So if you buy 1000 CFD contracts of BHP at $33.00, then you will be required to pay interest on $33,000. This is how CFD finance works when trading long.

CFD Finance When Selling CFDs

When you short sell a CFD you get paid straight away for the position you sold. You do not see the money directly in your bank account, but the CFD broker does receive the cash if they sell the underlying instrument.

Selling 1000 CAT at $41 using Contracts for Difference would return you $41,000 on which you will get interest while the position continues to be held.

How Much Will CFD Finance Cost?

Interest rates vary from provider to provider but are usually based on the following formula. A reference rate of interest plus a margin of 2 - 3% for long positions and a reference rate of interest less a margin of 2 - 3% when trading short. The reference rates used are typically the Reserve Bank of Australia (RBA) rate or the London Interbank Offered Rate (LIBOR).

The CFD broker then makes money via the interest rate margin that they charge on every position. In effect CFDs are just a fancy way for CFD brokers to lend money to their clients.

When Is CFD Finance Charged

CFD finance is not calculated on positions that are entered and exited on the same day. Interest is only charged if a position is held overnight. So intraday positions are excluded from CFD finance.

The rate of interest is very low relative to the impact of movement in a CFD position. With current interest rates at about 6% per annum fluctuations in the CFD position can easily be more than this in a day.