ASIC guide to trading CFD's.

While I was on holidays, ASIC released a new guide that aims to provide retail investors with independent advice on how contracts for difference (CFDs) work and the risks that can be involved in CFD trading.

"Our research with CFD traders found that many traders don't know or don't appreciate key aspects of how CFDs work, despite the fact that they are actively trading them," ASIC commissioner Greg Medcraft said.

I'd certainly like to think that my readers are aware of the mechanics of CFD's, and how they differ from regular equities trading. If you're not, you need to be. In my opinion, it's particularly important to familiarise yourself with the difference between Market Maker and Direct Market Access models (Page 12). Choosing a provider with a DMA model is the only choice as far as I'm concerned. Why even risk trading in a situation where your provider could be profitting from your losses.

The leverage available in CFD Trading can certainly lend itself to large losses if you don't manage it properly and show strong discipline...but I personally wouldn't be in the position I am now without CFD's. Trading CFD's and utilising that leverage wisely and conservatively has helped me grow my equity consistently for many years now.

In the coming weeks I'll try to post in more detail what I see as the advantages and potential pitfalls of CFD's, but in the meantime the guide can be found here.