Handbook On CFDs Trading

New Release Apr 2011

This book is written for Singapore traders and investors who want to take advantage of CFDs in their trading.

It shows you how CFDs are traded and the strategies you can use for both bullish and bearish market conditions.

Unlike other CFDs book published by overseas authors, this book is unique as Singapore stocks are used as examples when explaining how a trading strategy can be applied. This book is written to help you to increase

Make Money When The Markets Goes Up or Down With CFDs Trading! Learn To Make Money All Year Round in Stocks!

your probability of success when trading CFDs.

The First Book On CFDs Trading For Singapore Investors!!!

Title: Handbook On CFDs Trading

ISBN: 978-981-08-6670-9 Author: Nicholas Tan (BEST SELLING AUTHOR of Handbook on Forex Trading - No. 1 Bestseller Book On Forex In Singapore) Published by Rank Books Price: $18.00 (before GST)

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Handbook on

CFDs Trading Nicholas Tan

Foreword by Goh Kheng Chuan

Published by

www.rankbooks.com

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First Published March 2011 Published and distributed by: Rank Books Blk 1002 Toa Payoh Ind Pk #07-1423 Singapore 319074 Tel: 65-62508180 Fax: 65-62506191 Website: www.rankbooks.com

www.rankseminar.com Email: admin@rankbooks.com ISBN 978-981-08-6670-9 Cover Design and Typeset: Rank Books (www.rankbooks.com) All Rights Reserved. No part of this publication may be reproduced or copied in any form or by any means - graphic, electronic or mechanical, including photocopying, recording, taping or information retrieval systems - without written permission of Rank Books.

Conditions of Sale: This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser.

While every reasonable care is taken to ensure the accuracy of information printed, no responsibility can be accepted for any loss or inconvenience caused by any error or omission. The ideas, suggestions, general principles, examples and other information presented here are for reference and educational purposes only. This book is not in anyway intended to give investment advice or recommendations to trade. The author or publisher shall have no liability for any loss or expense whatsoever relating to investment decisions made by the reader.

Acknowledgement: Special thanks to NextVIEW Pte Ltd for granting the permission to reproduce the charts that appeared in the respective pages in this book.

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Foreword Books on investment related topics have always been dominated by western authors in the Singapore book market.

Few are written in the local context using examples that Singaporean investors can relate to.

The name Nicholas Tan is a rare gem that one can find on the bookshelves in Singapore whose books are as popular and if not more popular than imported titles. There are not many traders who are also authors in Singapore but Nicholas Tan has excelled in both areas. As a trader, Nicholas Tan has more than 20 years of trading experience in forex, stocks and CFDs trading and as an author, he has written two bestselling books on forex trading. I must credit him for his ability to make complicated investment concepts so simple for the lay people.

To write a book requires knowledge, time and effort, but to write a good book requires the art of simplicity. It is this art that differentiates a best-selling author and a author who writes solely based on what he knows.

This book is a valuable asset that encompasses important aspects of CFDs trading and retail investors and new stock traders will beneďŹ t immensely from the information in the book.

Goh Kheng Chuan Author of “Handbook For Stock Investors�, A National Bestseller iii

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Preface The internet and online brokers have brought about new instruments of trading and it has led to the opening of new markets to trade. Retail investors and traders are not limited to trading stocks of their own countries but they can also now trade a variety of instruments such as options, forex, commodities, and contracts for difference (CFDs) of different markets.

This means that traders and retail investors now have more ways to profit from these various instruments and markets. Contract for difference is a relatively new trading instrument in Singapore. This is the first guide on CFDs trading ever written and published in Singapore.

This book is written for Singapore traders and investors who want to take advantage of CFDs in their trading. It shows you how CFDs are traded and the strategies you can use for both bullish and bearish market conditions.

Unlike other CFDs books published by overseas authors, this book is unique as Singapore stocks are used as examples when explaining how a trading strategy can be applied.

CFDs is a double-edged sword. If you know how to trade it and use it in your trading strategy, you can reap good iv

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profits using a small amount of capital as it is a leverage product but at the same time, because it is a leverage product, it can cause you to lose big amount if you have yet to master the art of trading CFDs. I hope this book will not only show retail investors and traders the potential profits they can make trading CFDs but at the same time educate them of the trading risks and take the necessary actions to minimise them.

I wish you every success in your trading.

Nicholas Tan Also Author of “Handbook On Forex Trading”, A National Bestseller and “Forex Trends and Profitable Patterns”.

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About the author Nicholas Tan has more than 20 years of experience in the area of foreign exchange (“forex”) trading. He worked for 13 years as a forex trader with banks in Singapore, gathering much invaluable experience in the process. He rose from the ranks to vice president, making millions for the banks in those years.

From 2005 to 2008, Nicholas Tan was involved in the Diploma in Wealth Management Course at a private institute where he taught as a freelance lecturer, a module on forex and CFD Trading (stock market).

In conjunction with Rank Books and Rank Seminar, Nicholas Tan has been running a monthly forex trading course since 2007. This class is now Singapore’s longest running forex course, and has exposed hundred of participants to his simplified yet highly effective forex trading techniques.

Nicholas Tan is also the author of two best sellers; “Handbook on Forex Trading”, an easy guide to profitable currency trading, and, “Forex Trends and Profitable Patterns” an easy guide to spot profitable trends and patterns in forex. Handbook on Forex Trading was ranked among the 10 Top Best Sellers in Popular bookstores in vi

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2007 for several months. Both books are still best sellers in local bookstores till today.

Nicholas Tan has been featured in the Channel News Asia program, “Cents & Sensibilities EPISODE 6 - Money, Money, Money: Forex Trading”. On national television, he has given advice on how one can maximize their gains on the forex market. You can catch him at http://www. channelnewsasia.com/cents/episode6.htm.

Besides a Bachelor Degree in Business Administration from the National University of Singapore, Nicholas Tan is also a Certified Financial Technician (“CFTe”). This is an elite certification from the International Federation of Technical Analysts, given to a handful of qualified technical analysts across the world after passing their rigorous examinations. As of today, there are not many CFTe holders in Singapore.

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Contents Chapter 1 What is CFD?

1

2 2 3 4 5 6 10 11

What is a CFD? Types of CFDs Price of CFDs How to Get Started?

Margin Trading and Leveraging Why Trade CFDs? The disadvantages of CFDs Risk Management in Trading CFDs

Chapter 2 CFD Trading for Hedging

15

16 17 19

Equity – Hedging with Individual Stock Equity – Hedging with High Beta Stock Equity – Hedging with Index

Chapter 3 CFD Trading Using The Pair Spread 21 Strategy

CFD Equity Pair Spread Trading Within Equity Sector Across Equity Sector

22 23 25 ix

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Inverse Strategy Using CFDs CFD Index Pairs

28 31

Chapter 4 Directional CFD Trading Strategies 15 Using Fundamental News

SGX Research Website Using Fundamental Information for Trading Corporate Earnings Broker Analyst’s Report Making Sense of Analyst’s Report Not All Brokers’ Reports Are the Same Implementing The Strategy of Trading on Fundamental Information Trading on a Company Reporting Better Quarterly Earnings Using CFD for Leverage

35 38 40 44 45 49 52 53 54

Chapter 5 Directional CFD Trading Strategies 57

Using Gaps What is a Gap? Common Gap Breakaway Gap Midway Gap Exhaustion Gap

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57 58 63 64 65 68

Japanese Candlestick Pattern Trading Momentum Retracement Indicator Explanation Momentum Retracement Long Position Setup Momentum Retracement Short Position Setup

83 88 89 92

94

Chapter 6 How to choose a CFD Broker

97

97 98 99 99 100 101 101 101 102 102

Regulation Markets and Products Brokerage fees or Commission Rate Platform Type and Software Features Inactivity Charges Minimum Sum Funding Options Training Programs Margin Requirement Interest Charges

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Chapter 1: What is a CFD ?

CHAPTER 1

What is a CFD ?

I

n a financial crisis when bad news rules the market, there is little an investor can do if he or she is trading with shares. The only thing he can do is to cut his losses or wait at the sideline for share prices to fall till rock bottom levels and buy them cheap to sell when prices go up again in order to make a profit. However, this could take a year or two before the bear market ends. This is because when you trade shares, you are not allowed to short the market – selling shares you do not own, for a profit. Hence, during the financial tsunami which started

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Handbook on CFDs Trading

in late 2007 till 2009 while most investors are either busy cutting their losses or counting their paper losses, a group of traders who knew how to trade using CFDs were smiling all the way to the bank.

This section covers the basics of CFDs and how it works in both rising and falling markets.

What is a CFD? CFD stands for contract for difference. A CFD is simply an agreement between two parties (you and your broker) to exchange the difference between the opening price and the closing price of a contract. If there is a profit between the opening and closing price, this amount of profit will be credited into your account with the broker. If there is a loss, this amount will be deducted from your account.

Just like holding shares, there is no expiry date in CFDs unlike options. You can carry the position as long as you like but there must be enough money in your account to support that position.

Types of CFDs A CFD mirrors the movement of the instrument on which it is based upon. A CFD could be based on shares traded

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Chapter 1: What is a CFD ?

on listed stock exchanges or it could be based upon an equity index like the Straits Times Index or the Dow Jones Index. It could also be based on a commodity as well like Crude Oil or Gold.

CFDs can be used to trade local and foreign shares, stock or sector index, futures and commodities. The number of instruments available for you to trade will depend on your broker. Some brokers offer traders more instruments than others.

For the purpose of this chapter, we will focus on CFDs whose underlying instruments are the shares traded on the Singapore Exchange (SGX).

Price of CFDs CFDs are traded almost the same way as trading shares.

The price of the CFD on a particular share counter will be the market price of the share as quoted by the stock exchange. However, unlike shares which are traded in a minimum lot size of 1000 shares per lot, the quantity of CFDs are usually not fixed. This means you can buy a quantity of 20 CFDs, 50 CFDs or 1200 CFDs.

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Handbook on CFDs Trading

How To Get Started?

You need to open an account with a broker that offers CFDs trading. As CFDs are traded on a margin account, you will need to deposit money into your account before you can start trading. Some brokers may require you to put in a minimum sum to open an account.

You must have at least 20% of the contract value in your account before you could trade. While there is no closing trade deadline, as long as your position is open, it will be revalued daily. Should the price of your open position drop below 20% of what you have in your account, there will be a margin call. This would require you to top up your account by a necessary amount to bring your deposit above the 20% requirement to continue holding on to your open position.

As the name suggests, in CFDs trading, there is no actual delivery of the shares when you buy or sell CFDs of the underlying shares. When you buy some Singapore Press Holding CFDs, you will not become a shareholder of SPH. It is just a book entry and when the position is closed, it is cash settled. It will be either money added into your account or money deducted from your account. However if Singapore Press Holding were to give out a dividend,

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Chapter 1: What is a CFD ?

your account will be credited with the dividend amount, if you are still holding the CFDs. However, if you short the CFDs, you will need to pay back the dividend amount when the share goes ex-dividend and suffer a drop in the share price. If there were to be a stock split, your CFD position will be adjusted accordingly.

Margin Trading and Leveraging A CFD is a margin product with leverage. This means that you can buy a large quantity of CFDs with a comparatively smaller amount of capital. For instance, if you want to buy 10,000 shares of ABC company at $10.00 per share, you would need to fork out $100,000 dollars ($10 x 10,000) to pay for your purchase. However, when you decide to buy 10,000 CFDs of ABC company, you are only required to fork out say 20% of $100,000 or just $20,000 in order to purchase the same number of shares. Hence, when you open a position, you do not have to put up the full amount of your purchase value. You just have to put up 10% to 20% of the contract value as margin. While you need to fork out less than the purchased value of the shares, be warned that you are liable to pay an interest charged on your position until your position is sold.

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Handbook on CFDs Trading

On top of the interest charge, there is a commission charge for each transaction.

Why Trade CFDs? There are many reasons why CFDs are attractive instruments for traders.

1) Higher Returns On Capital

With leveraging, you can use a small amount of money to make more money.

Here is an example. If you want to buy 1000 shares of OCBC from your normal broker, at $8.00 it will cost you $8000. You will need to pay up this amount after 3 days. But if you use this same amount of $8000 as a deposit in your CFD account, with a 10% margin required, you can buy 10,000 shares of OCBC. Instead of having only 1000 shares, you now have 10,000 shares. If you decide to sell after 5 days at a price of $8.20, you would make $200 from your normal broker if you have bought 1000 shares. However, if you have bought CFDs, you would have make $2000 for your CFDs position of 10,000 shares. In percentage term, you would have made

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Chapter 1: What is a CFD ?

a return on capital of 25% buying CFDs verses 2.5% returns if you bought the shares.

2) Bigger Position Size Means Bigger Profits In Shorter Time

To make $100 for 1000 shares means the price of the share must go up by 10 cents or more. But if you have 10,000 shares, to make $100, it means the price of the share must go up only by 1 cent.

Hence, with the ability to have a bigger position for less capital, you can profit from small movements in the share price over a shorter period of time.

3) Lower transaction cost

While your local internet trading for equity will cost you 0.275%, with other additional cost like SGX clearing fee, which means your cost per trade is now over 0.3%. But trading in CFDs for the same shares will cost you only 0.15%. That is almost half your cost. Low transaction cost equates to greater profit.

CFDs can be used to buy US shares as well. This is where low transaction cost really benefit you. The transaction cost for CFDs in US shares is 0.1% of the

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Handbook on CFDs Trading

share’s contract value while your normal broker will charge you 0.4% to trade in US shares.

4) Shorting the market

The ability to short sell when market is down is perhaps the key attraction of CFDs. You can short CFDs without restriction. When you trade shares, you are unable to sell without first having the shares in your CDP account (Central Depository Account). For CFDs trading, there is no such restriction. However, do note that not all stocks are available for shorting.

The list available for shorting varies from broker to broker.

You may want to check with the broker on the counters available for shorting before you open an account with them. There is no restriction on the period you can carry your short position as well. You can carry your short position as long as you like, as long as your account has enough deposit to maintain that short position. In other words, you can sell today and 10 days later you buy back to close the position.

The other benefit of shorting CFDs is that when you are holding a short position, you actually earn interest on your short position as well. This means

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