Today it we are going to look at the disadvantages of trading sector Contracts for Difference (CFDs).
What you need to keep in mind when trading any product is that each particular product has advantages and disadvantages and all you need to be aware of is how that product(s) works for you.
Sector CFDs usually have wide spreads One of the things to be aware of when trading sector CFDs is the fact that most of them have very wide spreads.
If you prefer trading over a shorter timeframe then sector CFDs may not be the product for you as a result of the large spread between the first buyer in the first seller.
It is not uncommon for a sector CFD like the material sector to have a 15 to 20 point spread which means the sector has to move a minimum of 15 to 20 points in your favour just to break even before you even consider making a profit.
As a result of this wide spread it is more advantageous to trade sectors over a longer time frame.
Sector CFDs are only available through a market maker Whilst this isn't necessarily a major disadvantage, one thing to keep in mind is that market-makers create the rules.
The reality is a sector CFD is not a financially tradable product through the Australian Stock Exchange.
Instead, a sector CFD is a product created by the market-maker that mirrors the performance of the stocks that make up that sector.
As a result the market-maker dictates the opening and closing times which may limit your opportunities to get in and out.
Usually a sector CFD is not available to trade until 15 minutes after the actual market opens and closes 10 minutes prior to the market close.
Those of you who have traded actively will know that these are some of the most active and volatile periods in the market.
It is during these active, volatile periods that your opportunity presents itself and if you are not able to take advantage of those periods then your trading edge may be limited or compromised.
Beware of the financing when trading sector CFDs One of the other disadvantages of trading sector CFDs is the high financing rate when you're holding a position long.
It is not uncommon for a market-maker to charge the overnight cash rate plus or minus 4% for long or short positions on a sector CFD.
The challenge you are faced with is the fact that sector CFDs have a large spread and in order to trade them efficiently you may need to hold the position for a long time frame.
The other side of the coin means that holding a sector CFD for a long period of time can result in increased financing costs.
So as you can see trading sector CFDs is a balance between finding the right time frame and reducing your overnight financing charges.
What you need to keep in mind when trading any product is that each particular product has advantages and disadvantages and all you need to be aware of is how that product(s) works for you.
Sector CFDs usually have wide spreads One of the things to be aware of when trading sector CFDs is the fact that most of them have very wide spreads.
If you prefer trading over a shorter timeframe then sector CFDs may not be the product for you as a result of the large spread between the first buyer in the first seller.
It is not uncommon for a sector CFD like the material sector to have a 15 to 20 point spread which means the sector has to move a minimum of 15 to 20 points in your favour just to break even before you even consider making a profit.
As a result of this wide spread it is more advantageous to trade sectors over a longer time frame.
Sector CFDs are only available through a market maker Whilst this isn't necessarily a major disadvantage, one thing to keep in mind is that market-makers create the rules.
The reality is a sector CFD is not a financially tradable product through the Australian Stock Exchange.
Instead, a sector CFD is a product created by the market-maker that mirrors the performance of the stocks that make up that sector.
As a result the market-maker dictates the opening and closing times which may limit your opportunities to get in and out.
Usually a sector CFD is not available to trade until 15 minutes after the actual market opens and closes 10 minutes prior to the market close.
Those of you who have traded actively will know that these are some of the most active and volatile periods in the market.
It is during these active, volatile periods that your opportunity presents itself and if you are not able to take advantage of those periods then your trading edge may be limited or compromised.
Beware of the financing when trading sector CFDs One of the other disadvantages of trading sector CFDs is the high financing rate when you're holding a position long.
It is not uncommon for a market-maker to charge the overnight cash rate plus or minus 4% for long or short positions on a sector CFD.
The challenge you are faced with is the fact that sector CFDs have a large spread and in order to trade them efficiently you may need to hold the position for a long time frame.
The other side of the coin means that holding a sector CFD for a long period of time can result in increased financing costs.
So as you can see trading sector CFDs is a balance between finding the right time frame and reducing your overnight financing charges.
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