Swing trading with CFDs  Why swing trading with CFDs?


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CFDs (contracts for difference) are a financial instrument which allows investors to trade an extremely wide range of products including shares, market indices and commodities like oil and gold in an efficient, transparent and low-cost way. 

The investor does not buy or sell the actual underlying instrument. He simply buys and sells a contract which replicates the economic effect of trading in the reference instrument. Profits (or losses) are credited (debited) to or from the account in the normal manner. 

The investor does not need to finance the total value of the position. The instrument tables specify the minimum (the margin in jargon) an investor needs to open a position. So it is the investor who determines the leverage he uses. Either he opens the position with just the minimum amount present (not advised) or with more. The margin is 10% for share CFDs and between 0.5% and 5% for commodity and index CFDs.

For example:
  • Position: Buy 1,000 CFDs of HSBC at $6.75. Total $6,750
  • Margin required: $675 (10%)
  • Buy 1 CFD on Crude Oil at $122. Total $12,200
  • Margin required: $366 (3%)
Leverage allows investors to benefit from small price movements.

CFD positions can be debited or credited a financing charge.

If you hold a long position one night or longer (i.e. you do not buy and sell the same day) you will be debited a financing charge. The interest owed is calculated as follows: 1/360 x (labor* + 3%). CFDs on futures (market indices, gold, crude oil ...) are not subject to this financing charge.

If you hold a short position one night or longer you will be credited a financing revenue.

CFDs & swing trading?

A swing trader wants to trade long and short on stocks.

Low commissions are crucial since large amounts of trades are undertaken.

Furthermore, a swing trader likes to apply a moderate leverage.

 It certainly appears that CFDs seem to be the ideal trading instrument:

  • With CFD's one can trade long & short on indices, stocks, futures and commodities.
  • Commissions on CFDs are quite low and stamp duty can be avoided.
  • Leverage is common on CFDs. Leverage on stocks can be up to 10, on indices even up to 200.
The disadvantage of CFDs are the financing costs. Should the swing trader keep his positions overnight (which is often the case), a financing cost applies. Having said that, keeping short positions overnight will incur no costs (and will actually bring additional revenue, should the labor rate rise above 3%).

As this cost for long positions is quite low, it does not hurt his performance in a considerable way.

Brokers: WHS invest. IB Brokers.

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