We have reviewed our market this week with a view to trading it using Contracts for Difference (CFDs).
What’s a CFD?
A CFD is an agreement to exchange the price difference of an instrument between the time a contract is opened and the time it is closed. CFDs are highly leveraged derivative products that allow traders to trade using margins from 3% to 25%, depending on the liquidity of the underlying instrument. In this section we refer to instruments in CFD trading which can be shares / indices.
Benefits of trading CFDS
One of the key benefits of trading using CFDs, particularly when trading the market short, is that the process is not complicated, it is simply just the reverse of trading long. There are other instruments for trading the market short which include options and solutions offered by margin lending providers, however there can be issues with the liquidity in the options market and problems in finding the stock to short with margin providers.
CFD Models
There are a number of CFD provider models such as the market maker model and the direct access model. As the names suggest, the marker maker model (MMM) is where the CFD derives a CFD price based on the price of the underlying instrument (it need not exactly match the price). The direct access model (DMA) uses prices which exactly match the price of the underlying instrument.
Things to consider when trading CFDs
The other key consideration when CFD trading is the liquidity of the underlying instrument. Traders should only trade instruments that are liquid, because their profit/loss account can be significantly impacted due to slippage when entering/exiting trades. With this in mind we have reviewed the S&P ASX top 20 stocks. Learn more about CFD Trading.
Major markets around the world are hovering around their key levels as defined by their 50 and 200 day moving average. In our previous article about Market Momentum we highlighted that the positive momentum that markets had enjoyed from March 2009 has now subsided. All the key markets are still below their 52 week highs and with the exception of Hong Kong and Germany, overseas markets are still below their 200 day moving average.
The S&P ASX 200 appears to also be losing momentum and is finding resistance at the key levels of the 50 and 200 day moving average. We have evaluated the top 20 stocks and summarised the results in the table and chart below.
Table: Performance of the S&P ASX Top 20 Stocks
The table above shows that generally the bias is to the downside in the medium term. In the ASX top 20 stocks, there are 12 stocks in a medium term downtrend and only 6 in a medium term uptrend. Of these 6, only 3 stocks are trading over 4 percent above their 50 day moving average. Half of the top 20 stocks are trading below their 50 day moving average and of these stocks, 6 are trading over 7 % below their 200 day moving averages, which confirms the underlying weakness in these stock prices.
Chart: Price Performance of the S&P ASX20 relative to key level of 50 and 200 day moving averages.
The chart above clearly indicates that the weakest stocks in the S&P ASX20 are: AMP, Brambles (BXB), Macquarie (MQG), QBE, and Westpac (WBC).
Conversely in the S&P ASX20 the outperformers are: Newcrest (NCM), Telstra (TLS) and Wesfarmers (WES).
As outlined above you can utilise CFDs to trade the market short on short notice, by trading on margins of 3% to 25%, and benefiting from downward movements in the underlying stock price. Your open positions will be valued every day at the close of business price, with your profits or losses, credited or debited to your account each day.
By Michael Hevern
Head of Research
Risk Disclaimer
Be aware that CFDs are leveraged products which carry a high level of risk to your capital, as it is possible to incur losses that exceed your initial investment. Therefore CFDs may not be suitable for your level of acceptable investment risk. Before proceeding with CFD trading, ensure you fully understand the risks involved, otherwise seek independent financial advice.
