Online CFD Brokers: Seven Tips To Selecting One

If you trade CFDs, you will realise that choosing a good CFD broker can make or break your system.

What do I mean by this?

A subtle way a CFD provider can affect your trading results is by having excessive slippage or high commissions. Depending on your trade sizes this may make a small difference or a large difference.

But another way a CFD broker can affect your stock CFD trading is by not allowing you to trade your CFD system as it is supposed to be traded.

Keep reading to find out how this can be the case and how CFD traders are overcoming this issue.

What you should do is to keep in mind these 7 points when considering an online CFD broker:

1. Their brokerage or commission cost each way (if any)

Most CFDs have a brokerage of about 0.1 to 0.4% of the trade size. There's also a minimum commission to consider of around $10-20, which will affect trades with small trade sizes. Some brokers have zero commission. Some CFD broker's commissions are actually negotiable, or differ according to whether you belong to a trading group, so remember to ask!

2. Their margin requirement for stock CFDs

Many CFD provider's margin requirements are around 10-20%. This menas they provide around about 5-10 to 1 leverage. There are some CFD market makers that require a margin of 30-80%, depending on the stock CFD that you want to trade. So if you need a lot of leverage, check the amount of leverage available to you.

3. Their number of tradable CFDs

Do you need to trade the top 100, 200, or even 300 of your stock exchange? If you're trading a system that needs a large number of stock CFDs than just the top 50 say, to make its maximum profits, then check their list of tradable CFDs. Note that if you're backtesting CFD systems, that the current top 200 of a stock exchange will be different to the list a year or two ago. So there is some potential for inaccuracies here.

4. Their number of shortable CFDs

Many CFDs are shortable compared to their underlying stocks or shares which are not shortable. This is one of the several reasons why CFD trading has become more popular. Again, if you need a large list of shortable CFDs for your trading system to work properly, then check the provider's exact list of shortable CFDs if possible. Sometimes they're available form their website, and sometimes they're not. If so, you'll need to email the brokers for more details.

5. Their interest charges for long positions held overnight

There is an interest charge for long positions held for more than one day. CFD brokers use rates that slightly vary, and are based around a major bank's overnight interest or cash rate. The rate for long positions is typically 2-3% above that reference rate. If you're short, the interest is paid to you, at a rate that is 2-3% below that reference.

6. The order types that are able to be placed

This is where a CFD broker or provider can make your trading system easy to trade or difficult to trade, or even tradable or not.

With some CFD providers, you can place your orders at when the market is closed as well as when the market is open. This is handy for those who work during the day, and need to place their entry orders and adjust their stop losses at night.

With other providers on the other hand, you'll have to place orders to enter CFD positions during market hours.

Even when you can place orders to enter a position after market hours, ask the provider:

1. Can you place limit orders or stop orders to enter positions? 2. Also, if you're placing limit buy orders to enter long positions, can you place them at above and below the closing price, when the market is closed? That is, on either the wrong or right side of the market?

Also find out about their “if done” stop loss orders, and how they're handled.

Do you need guaranteed stop losses as well? These will have a premium attached to them. And if so, can you move them at no cost?

7. Do they provide Direct Market Access CFDs where the CFD prices are the same as the underlying stock, or is the spread widened?

If a brokers widens their spread by 0.05% for example, then this may be considered a cost of trading. Consider this in relation to the other transaction costs however.

A provider that widens their spread slightly may be the one that has the smaller commissions, and vice versa. So look at their overall deal.

So there's some food for thought when it comes to looking at CFD providers to see if they suit you or not.

As you can see, some CFD brokers are strong in one area of the overall picture, such as they have many CFDs that are shortable, but have a high margin requirement or even a high commission cost. On the other hand, other providers may offer low commissions but do not provide the specific order types that you require.

You can get around these issues, which many CFD traders are doing…

For more tips on choosing a CFD broker, see the website in the resource box below this article.

Keep these points in mind when checking out CFD brokers. You want maximum profitability as well as the distinct ability to place the trades that you want to trade at the times that you want to place the trades.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com