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Calculating CFD Finance RatesHow To Calculate CFD Finance Rates - The Full storyWhilst the majority of this site is dedicated to showing the positive aspects of CFD Trading, it is important to keep in mind the CFD risks that lie lurking around the corner when trading this exciting product. The key difference between trading shares versus trading CFDs is the overnight financing that is charged when you hold a CFD position overnight. CFD Finance – Holding CFD positions overnightCFD financing is charged when you hold a position overnight and most CFD brokers determine a position is held overnight if you hold the position after 5pm Eastern Standard Time in New York. That works out to be around 7am Australian time. Check your CFD brokers product disclosure statement (PDS) for their exact rollover time. The CFD Finance calculation – Calculating the daily interest chargeLong CFD position = (Total CFD position size * (RBA rate + 2%)) / 365 = ($10,000 * (7.25% + 2%)) / 365 = ($10,000 * 9.25%) / 365 = $925 / 365 = $2.53 per day debit NOTE: Calculating the daily rate can differ in some countries. For example Australia the UK use 365 days in the year and others may use 360 in their CFD Finance calculation. Read the Product disclosure statement of your CFD broker to work out which rate they use. Therefore to hold a $10,000 CFD position will cost around $2.53 every day you are long. Accessing Opportunity with CFDs First and foremost, it is important to know exactly what the costs of doing business are when trading CFDs. Secondly, understand that CFD Finance is simply the cost of doing business and it is a relatively small charge. Think of CFD financing as the cost to access more opportunity You see if you had $10,000 in your share trading account then $10,000 is all you could trade, thereby limiting your opportunity in the market to maybe 2 lots of $5,000 trades. When trading CFDs your $10,000 cash could access considerably more but let’s say $30,000. As a result you may wish to trade 5 lots of $6,000 trades, giving you a greater chance to diversify and most importantly, access greater opportunity. So think of CFD finance as the cost to access more opportunity, giving you a greater chance of accessing more profits. CFD Finance for a Short Sell CFD position Short Sell CFD position = (Total CFD position size * (RBA rate - 2%)) / 365 = ($10,000 * (7.25% - 2%)) / 365 = ($10,000 * 5.25%) / 365 = $525 / 365 = $1.44 per day credit CFD Finance changes daily based on market action CFD Finance charges will differ every day as your position rises and falls with the market. Day 1: Open CFD trade at $10,000 and position stays steady Day 2: Position moves into profit and is now worth $10,230 (CFD Finance will now be calculated on this new position size) Day 3: Market sells off and your CFD position is now worth $9,750 (CFD Finance will now be calculated on this new position size) Day 4: These daily fluctuations are too much! I’m bailing. Avoiding overnight CFD Finance charges If you hold a CFD position intraday by buying after 10am and selling before 4pm on the Australian market, then there will be no CFD Finance charges as you never held the position overnight. Does that mean Trading CFDs is better suited to short term Intraday trading? Not at all. Remember your goal will always be to
If that means you trade intraday and avoid overnight interest then fantastic. If you find however, that your average hold for a trade is 35 days and you system(s) are profitable then run with that irrespective of the overnight interest charges. When testing your system(s) allow some room for overnight financing. Your goal will always be to trade your most profitable trading system over a time frame that fits you. Do not attempt to become an intraday trader just to avoid overnight CFD Finance. CFD Tutorial Disclaimer: Trading Contracts for Difference carry risk where you can lose more than what you start with. View our full disclaimer here. |
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