©CMC Markets 2005 Contracts For Difference David Jones, Chief Market Analyst Authorised and...

©CMC Markets 2005

Contracts For Difference

David Jones, Chief Market Analyst

Authorised and regulated by the Financial Services Authority

©CMC Markets 2005

CFD Seminar - For Intermediate Clients

Risk Warning

Contracts For Difference carry a high level of risk to your capital. It is possible for you to incur losses greater than your initial stake. Only speculate with money you can afford to lose. Prices may move rapidly against your interests and resulting losses may require further payments to be made. Contracts For Difference may not be suitable for all customers; therefore ensure you fully understand the risks involved, and seek independent advice if necessary.

©CMC Markets 2005


CMC Markets Clients in over 100 countries Seven international offices on four continents Frankfurt, Toronto, Hong Kong, Beijing, Sydney,

New York, London Due to this expansion, it was decided that a new

single brand name was required to unify all of our global operations

As of Monday 19 September, CMC Group/deal4free.com changed its name to CMC Markets

We will continue to provide the award-winning service you expect from a global market leader

©CMC Markets 2005


CFDs – the concept

If you understand how buying and selling of other financial instruments works, the concept of CFDs is not difficult to grasp

A CFD offers you all the benefits of trading shares without having to physically own them

It is a contract that mirrors the performance of the underlying instrument

As with traditional share trading, your profit or loss is governed by the price you buy at and the price you sell at (and vice versa for short-selling)

CFDs are a margined product, allowing you to make the most of your trading capital

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Trading Long & Short

Traditionally, the way to profit from markets is to “buy low, sell high”

This is fine when markets are rising, but not much use in a bear market

CFDs allows you to sell short – “sell high, buy low” If you think ABN Amro will slide from €22.00, you can sell for

example 1,000 CFDs at €22.00 In effect you are selling something you do not own, aiming to buy

it back cheaper, later on Assume it falls to €21.00 – our trader now buys 1,000 CFDs at

€21.00 to close her position. Her profit is €1,000 excluding any commissions due (€1 fall x 1,000 CFDs shorted). When going short, traders receive a financing payment on their initial margin.

All markets covered by CMC Markets can be shorted

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Margin

More “bang for your buck” - a way of making the most of your trading capital

Allows you to spread risk across many markets and take advantage of several opportunities

Fantastic trading tool as long as the trader does not use it as an excuse to take on overly large positions in relation to the size of his trading account

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Margin – example trades

XYZ are trading around €10 per share Trader A goes long, buying 1,000 CFDs at €10 He now has the equivalent of €10,000 worth of shares His margin requirement with CMC Markets is 5%.

€500 will be allocated from his account against this trade as initial margin

Two months later XYZ are €12 per share Trader A closes his position, selling 1,000 CFDs at €12. He nets a €2,000 profit, less the interest costs of

running the position for two months and any commissions due.

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Margin – example trades

ABC are trading around €10 per share Trader B goes short, selling 1,000 CFDs at €10 He now has the equivalent short position of €10,000 worth

of shares His margin requirement with CMC Markets is 5%. €500 will

be allocated from his account against this trade as initial margin

Three days later, ABC rally sharply and hit €12 Trader B closes his position, buying 1,000 CFDs at €12. He realises a €2,000 loss as the price went up when he was

short plus any commissions due It is important to appreciate that your potential loss is not

limited to your initial margin deposit – you could lose more

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It is important to understand that Risk and Reward always go hand in hand

Margin can be used to magnify profits, but it will of course also magnify losses

Intelligent traders never over commit themselves on margin

Used sensibly margin is a useful trading tool

Margin

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A Variety Of Orders

There is a misconception that products such as CFDs mean you have to be stuck to your screen all day long

With CMC Markets there are all sorts of orders that mean you do not have to watch the screen 24/7 to execute buys or sells and can help manage your risk

Limit orders can be placed to enable you to enter or exit a position at a pre-determined price or better

Stop orders can be used to enter or exit a position if a certain level is breached

Guaranteed stop loss orders mean you can quantify your risk right from the start of a trade

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A Wide Range Of Markets Available

International Individual Shares, But Also Global Stock Indices

Sectors e.g. Retail; Banking Currencies e.g. GBP/USD; EUR/GBP Commodities e.g. Oil; Corn Bonds e.g. UK Gilts; US T Bonds Precious & base metals e.g. Gold;

Platinum

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CFDs Summary

Transparency – if a share price is trading at €19.30/€19.35, the CFD should be the same

No Time Limit – CFDs do not expire – in theory a trader could run a position for ever

Trade Long & Short – The opportunity to profit from falling as well as rising markets

Trade a variety of different markets – the stock market is not the only market in the world

Flexible orders to set up entry levels and manage risk – you do not need to be stuck in front of a screen all day

No minimum trade size – trade from as small as one CFD

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TA: Background & Basic Assumptions

The study of market price action, primarily through the use of charts to try and forecast future market direction

The technical analyst studies the effect of fundamental factors (company announcements; interest rates; unemployment numbers etc.) on the market, rather than the underlying fundamental factors themselves

The technical analyst works on the assumption that the market is right. If, for example, a company comes out with what appears to be positive news – e.g. an increase in profits - but the share price continues to drop, the technical analyst will not assume the market is wrong and would not buy

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Support & Resistance

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Support & Resistance Arguably the most basic form of market analysis and

thought by many to be the most effective The main concept is that levels that were important in

the past will be important again in the future If a market (share; index; currency; commodity etc) has

been in decline and then turns the corner and starts to rally, there has clearly been a change in underlying sentiment. The low point reached before the rally is known as a support level

If a market has been rallying then runs out of steam and starts to slide, there has obviously been another switch in sentiment and the high point is known as resistance

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Support Example US30 Index

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Support Example EUR/USD

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Support & Resistance - Breakouts

Support & Resistance Levels do not stay intact forever. If they did, markets would never trend up or down – they would remain in sideways ranges

If a market manages to break a previous level that has previously stopped a rise or a fall, it could be taken as one of the most basic “change in sentiment” signals

From a text book point of view, although of course no strategy works on every occasion, break ups through resistance are viewed as a positive sign; break downs through support are seen as negative

©CMC Markets 2005


Support & Resistance Summary

This form of chart analysis is not rocket science, but it can help gauge the prevailing sentiment in a financial market, across different time frames

Levels that were important in the past are expected to be important in the future - until the market signals otherwise

Pullbacks to support are used by chartists to help set up buying opportunities – failures at resistance are used to highlight selling opportunities

Breaks through these levels suggest that sentiment is changing. These can be used to initiate new positions, or to help decide where stop-loss orders should be set to exit existing trades

©CMC Markets 2005

Contracts For Difference

David Jones, Chief Market Analyst

Authorised and regulated by the Financial Services Authority

©CMC Markets 2005 Contracts For Difference David Jones, Chief Market Analyst Authorised and...

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