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This book falls into two sections. The first is an
excellent, detailed, introduction to contract for difference (CFD) trading. What makes
this excellent is not just the detail of the mechanics of the CFD industry. It is the
frank discussion of how the industry makes its money from the activity of traders. When we
use a stockbroker, we know clearly how his income is derived from our trading activity.
The CFD market derives its income from the inside spread, and from an interest charge.
The primary attraction of CFD trading is leverage
created by margin trading. The nature of the CFD market makes it uniquely suited to short
term trading. CFD publicity usually stops at this point. This book continues to explore
the suitability of this financial instrument. The nature of leverage means it is most
suited to experienced traders who have good trading discipline, and excellent
understanding of stop loss techniques, and who appreciate the impact of money management.
Although there is no chapter headed, The
Disadvantages of CFD Trading there is solid discussion of the pitfalls involved. The
most significant is the misunderstanding of the construction of the CFD market. It reflects
the underlying physical market and in some ways is subject to the same order execution
limitations of the physical market. A large
order may be filled at an average price which may be different from the quoted price at
the top of the depth of market order line. The book clearly explains how this price is calculated and applied.
Although the author works for the CFD service,
dealforfree.com, the book provides a good survey of the risks and rewards associated with
these trading instruments which are ideally suited to the experienced speculative trader.
This type of trading is in some ways similar to the tape reading skills
initially used by US trading legend, Jesse Livermore and others.
The second section of the book examines a selection
of short term trading strategies and their application to CFD trading. Just as warrants
and options provide a way to leverage short term price moves, so too do CFDs, but with one
very important difference. There is no price distortion due to time decay calculations.
The CFD pricing is transparent and directly reflects the price movement of the underlying
This is a good introduction to these strategies, and
shows how CFD trading is able to leverage this analysis. The section also includes some
examples of more advanced strategies for hedging and pairs trading.
This book provides a good coverage for traders who
want to know more about CFDs and who wish to get behind the advertising hype.
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