In this episode of Truth About FX, Walter dives into CFDs and how to trade them successfully. Did you know that it is illegal to trade them in certain countries around the world? Walter gives some insider information in finding the right broker for you. And the two advantages of trading forex versus other instruments in the market.
Download (Duration: 05:18 / 12.7 MB)
In This Episode:
00:42 – they are illegal
01:32 – swing that sucker
03:08 – a cheeky way
04:06 – bite the bullet
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Somebody asked me how does CFDs work and do you have any tips on trading them successfully? What do you say to that?
Walter: CFDs are only for a few — if you’re listening to this, you’ve never heard the term CFD and you’ve been trading for a while. That is because you are living in the United States. They are illegal so you cannot trade them.
Walter: Basically, CFDs are a way for you to get into the futures market without actually having a futures account. You can have better leverage and all that sort of stuff. Although, the leverage I think is about equal now in the States but because forex is basically regulated by the futures guys.
Essentially, you can trade coffee for example or the DAX which is the German Index. The German equivalent like the DAO. You can trade that with your broker but here is the rob. You’ve got to make sure your broker’s choice becomes really important and the reason why is because some brokers are going to be really… They’re going to swing that sucker around. You’re going to look, “The DAO actually didn’t move that much today why did you spike me and stopped me out?”
They’ll tell you this is not the DAO market. If you are trading the DAO as a CFD, you’re trading like a mirage. It’s like a copy of a copy. It’s not really the same. Yes, it’s true. If you look at West Texas crude oil and it goes up, it’s probably going to go up about the same amount on your CFD chart but that is not set on stone.
You really need to look at the reputation of the broker and test them out. The second thing of this is spreads will vary widely too and the amount of the margin that you get. It becomes a little bit tricky to choose the right broker.
Probably almost worth it to just find the right broker for CFDs and only trade CFDs on that platform. That will be my recommendation because when I first started trading them I was like, “Ohh! This is awesome. I have all these extra markets to trade.”
But then I realized really quickly that just because the chart looks like with one broker, it could be really different with your position. It basically gives them license to stop you out or whatever. If you have a really tight stop and you’d say, “Why did you do that?” They’d say, “Our market is different. Our trades are a little bit higher than the NASDAQ so our NASDAQ chart is a little higher” or whatever. You just have to be really careful.
Hugh: Okay, cool. It’s good to know.
Walter: It’s a cheeky way of trading the futures and the indices if you don’t have access to the futures account or you don’t want it or whatever.
Hugh: Is the commission or the spread smaller in futures?
Walter: I don’t trade futures. I don’t know. I will trade futures if my leverage is totally squashed in forex. Like, if the way things are going, it looks like most of the countries are basically going to kill our leverage.
The two advantages I see to forex are that the charts are really clean. I like them. I like the fact that they’re not too gappy and that we get good leverage. The round the clock thing, I don’t really care about that. It’s kind of nice but I think that’s why the charts are relatively clean and not very gappy because it does trade almost round the clock like 22 hours a day or whatever.
I like that but if we lose leverage like if it keeps going the way it is going around the world — which it looks like it is — I might have to just move to futures and just bite the bullet. I mean, some of your CFD brokers will give you awful spreads but some of them are quite good.
See, you just have to find the right one that offers the right leverage and spread combination and you feel comfortable with it. That’s where your testing really comes in. I like to test brokers for a while to see and a really good test is like to put your money in and then take it all out or almost all of it out, almost immediately. It is a great way to test and find out how these guys are going to do with that.
I actually, for the first time, lost an account with the broker that basically gone under or they’re being sued or whatever. That was a first for me. I avoided them for years and years. I barely just avoided many of them but this time luckily it was just a test account but I don’t think I’ll ever see that money again. You just have to be really careful about the one that you pick if you are going to trade CFD.
Hugh: Okay, cool. Thanks for the warning, Walter.