Sceeto Stock Trading Indicators: Sep 15, 2012

Saturday, September 15, 2012

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text courtesy of Wikipedia
The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.
Trading in the United Kingdom accounted for 36.7% of the total, making it by far the most important centre for foreign exchange trading. Trading in the United States accounted for 17.9%, and Japan accounted for 6.2%.[57]
Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Most developed countries permit the trading of derivative products (like futures and options on futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Some governments of emerging economies do not allow foreign exchange derivative products on their exchanges because they have capital controls. The use of derivatives is growing in many emerging economies.[58] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.
Top 10 currency traders [59]
% of overall volume, May 2012
Rank Name Market share
1 Deutsche Bank 14.57%
2 Citi 12.26%
3 Barclays Investment Bank 10.95%
4 UBS AG 10.48%
5 HSBC 6.72%
6 JPMorgan 6.6%
7 Royal Bank of Scotland 5.86%
8 Credit Suisse 4.68%
9 Morgan Stanley 3.52%
10 Goldman Sachs 3.12%
Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004.[60] The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot turnover, or $150 billion per day (see retail foreign exchange platform).
Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house. The biggest geographic trading center is the United Kingdom, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the International Monetary Fund calculates the value of its special drawing rights every day, they use the London market prices at noon that day.

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text courtesy of Wikipedia
Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is the interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size”.[61] Central banks also participate in the foreign exchange market to align currencies to their economic needs.
[edit]Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[edit]Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
[edit]Foreign exchange fixing
Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the market. Banks, dealers and traders use fixing rates as a trend indicator.
The mere expectation or rumor of a central bank foreign exchange intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[62] Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Southeast Asia.

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text courtesy of Wikipedia
The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]
The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.[2]
In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:
its huge trading volume representing the largest asset class in the world leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[4]
The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps
$207 billion in options and other products

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text courtesy of Wikipedia
Alert software is used to monitor specific equities, such as stocks, options, currencies, warrants, etc., and provide a notification of when specific price, volume and technical analysis investment conditions are met. As an example, a person who uses technical analysis might want to be notified when the RSI indicator rises above 70, followed by the price falling below its 20 day moving average; using alerting software the user will be able to create an alert, which will provide a notification of when the technical analysis investment conditions are met. When alert conditions are met, a notification is typically communicated via an on screen pop up or sent as an email, instant message or text alert (to a mobile phone).
[edit]Custom indicators
Most technical analysis software includes a library of de-facto standard indicators (e.g. moving averages and MACD). Some software will also provide a mean to customize, combine or create new indicators. This is typically achieved with a proprietary scripting or graphical language.
[edit]Data feed
Technical analysis software is typically used with end of day (EOD), delayed or real time data feeds. EOD data feeds provide the end of day closing price for the given equity and is typically updated once a day at market close. Delayed data is typically delayed 15 to 30 minutes depending on the exchange and is the most commonly used data feed type.[citation needed] Real time data feeds provide tick by tick 'real time' data. Real time data is licensed on a per-exchange basis whereas delayed data is typically purchased on a regional basis, such as US markets, rather than an exchange basis.[citation needed]
[edit]Broker interface
Some technical analysis software can be integrated with brokerage platforms to enable traders to place trades via a user interface that they are familiar with. Typically these software providers try to differentiate themselves from the brokerage software through enhanced features such as automated trading.
[edit]Platforms

Technical analysis software is available in the form of commercial or open source software. Such software may be available on a computer, or on a mobile phone or personal digital assistant (PDA). Mobile phones and PDAs allow a user to access online technical analysis packages when away from their computer. However, packages that require the use of Java applets may not work on older model mobile phones or PDAs. Online technical analysis software packages provide access from any Internet-connected computer (including a suitably equipped mobile or PDA), but may require the user to store their information with the provider. Installed, downloaded software will only be available on the computers that the user has downloaded and installed it on.

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text courtesy of Wikipedia
The price action trader will use setups to determine entries and exits for positions. Each setup has its optimal entry point. Some traders also use price action signals to exit, simply entering at one setup and then exiting the whole position on the appearance of a negative setup. Alternatively, the trader might simply exit instead at a profit target of a specific cash amount or at a predetermined level of loss. A more experienced trader will have their own well-defined entry and exit criteria, built from experience.[8]
An experienced price action trader will be well trained at spotting multiple bars, patterns, formations and setups during real-time market observation. The trader will have a subjective opinion on the strength of each of these and how strong a setup they can build them into. A simple setup on its own is rarely enough to signal a trade. There should be several favourable bars, patterns, formations and setups in combination, along with a clear absence of opposing signals.
At that point when the trader is satisfied that the price action signals are strong enough, the trader will still wait for the appropriate entry point or exit point at which the signal is considered 'triggered'. During real-time trading, signals can be observed frequently while still building, and they are not considered triggered until the bar on the chart closes at the end of the chart's given period.
Entering a trade based on signals that have not triggered is known as entering early and is considered to be higher risk since the possibility still exists that the market will not behave as predicted and will act so as to not trigger any signal.
After entering the trade, the trader needs to place a protective stop order to close the position with minimal loss if the trade goes wrong. The protective stop order will also serve to prevent losses in the event of a disastrously timed internet connection loss for online traders.
After the style of Brooks,[8] the price action trader will place the initial stop order 1 tick below the bar that gave the entry signal (if going long - or 1 tick above if going short) and if the market moves as expected, moves the stop order up to one tick below the entry bar, once the entry bar has closed and with further favourable movement, will seek to move the stop order up further to the same level as the entry, i.e. break-even.
Brooks also warns against using a signal from the previous trading session when there is a gap past the position where the trader would have had the entry stop order on the opening of the new session. The worse entry point would alter the risk/reward relationship for the trade, so is not worth pursuing.[13]

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text courtesy of Wikipedia
There is no evidence that these explanations are correct even if the price action trader who makes such statements is profitable and appears to be correct. Since the disappearance of most pit-based financial exchanges, the financial markets have become anonymous, buyers do not meet sellers, and so the feasibility of verifying any proposed explanation for the other market participants' actions during the occurrence of a particular price action pattern is tiny. Hence the explanations should only be viewed as subjective rationalisations and may quite possibly be wrong, but at any point in time they offer the only available logical analysis with which the price action trader can work.
The implementation of price action analysis is difficult, requiring the gaining of experience under live market conditions. There is every reason to assume that the percentage of price action speculators who fail, give up or lose their trading capital will be similar to the percentage failure rate across all fields of speculation. According to widespread folklore / urban myth, this is 90%, although analysis of data from US forex brokers' regulatory disclosures since 2010 puts the figure for failed accounts at around 75% and suggests this is typical.[10]
Some sceptical authors[11] dismiss the financial success of individuals using technical analysis such as price action and state that the occurrence of individuals who appear to be able to profit in the markets can be attributed solely to the Survivorship bias.A price action trader's analysis may start with classical technical analysis, e.g. Edwards and Magee patterns including trend lines, break-outs, and pull-backs,[12] which are broken down further and supplemented with extra bar-by-bar analysis, sometimes including volume. This observed price action gives the trader clues about the current and likely future behaviour of other market participants. The trader can explain why a particular pattern is predictive, in terms of bulls (buyers in the market), bears (sellers), the crowd mentality of other traders, change in volume and other factors. A good knowledge of the market's make-up is required. The resulting picture that a trader builds up will not only seek to predict market direction, but also speed of movement, duration and intensity, all of which is based on the trader's assessment and prediction of the actions and reactions of other market participants.
Price action patterns occur with every bar and the trader watches for multiple patterns to coincide or occur in a particular order, creating a 'set-up'/'setup' which results in a signal to buy or sell. Individual traders can have widely varying preferences for the type of setup that they concentrate on in their trading.

An candlestick chart of the Euro against the USD, marked up by a price action trader.
This annotated chart shows the typical frequency, syntax and terminology for price action patterns implemented by a trader.
One published price action trader[8] is capable of giving a name and a rational explanation for the observed market movement for every single bar on a bar chart, regularly publishing such charts with descriptions and explanations covering 50 or 100 bars. This trader freely admits that his explanations may be wrong, however the explanations serve a purpose, allowing the trader to build a mental scenario around the current 'price action' as it unfolds, and for experienced traders, this is often attributed as the reason for their profitable trading.

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text courtesy of Wikipedia
The concept of price action trading embodies the analysis of basic price movement as a methodology for financial speculation, as used by many retail traders and often institutionally where algorithmic trading is not employed, and at its most simplistic, it attempts to describe the human thought processes invoked by experienced, non-disciplinary traders as they observe and trade their markets.[1][2][3][4] Price action is simply how prices change - the action of price. It is readily observed in markets where liquidity and price volatility are highest, but anything that is bought or sold freely in a market will per se demonstrate price action. Price action trading can be included under the umbrella of technical analysis but is covered here in a separate article because it incorporates the behavioural analysis of market participants as a crowd from evidence displayed in price action - a type of analysis whose academic coverage isn't focused in any one area, rather is widely described and commented on in the literature on trading, speculation, gambling and competition generally. It includes a large part of the methodology employed by floor traders[5] and tape readers.[6] It can also optionally include analysis of volume and level 2 quotes.
The trader observes the relative size, shape, position, growth (when watching the current real-time price) and volume (optionally) of the bars on an OHLC bar or candlestick chart, starting as simple as a single bar, most often combined with chart formations found in broader technical analysis such as moving averages, trend lines or trading ranges.[7][8] The use of price action analysis for financial speculation doesn't exclude the simultaneous use of other techniques of analysis, and on the other hand, a minimalist price action trader can rely completely on the behavioural interpretation of price action to build a trading strategy.
The various authors who write about price action, e.g. Brooks,[8] Duddella,[9] give names to the price action chart formations and behavioural patterns they observe, which may or may not be unique to that author and known under other names by other authors (more investigation into other authors to be done here). These patterns can often only be described subjectively and the idealized formation or pattern can in reality appear with great variation.
This article attempts to outline most major candlestick bars, patterns, chart formations, behavioural observations and trade setups that are used in price action trading. It covers the way that they are interpreted by price action traders, whether they signal likely future market direction, and how the trader would place orders correspondingly to profit from that (and where protective exit orders would be placed to minimise losses when wrong). Since price action traders combine bars, patterns, formations, behaviours and setups together with other bars, patterns, formations etc. to create further setups, many of the descriptions here will refer to other descriptions in the article. The layout of descriptions here is linear, but there is no one perfect sequence - they appear here loosely in the sequence: behavioural observations, trends, reversals and trading ranges. This editing approach reflects the nature of price action, sub-optimal as it might appear.

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text courtesy of Wikipedia
CFD providers
CFDs are typically traded over-the-counter with a broker or market maker, known as a CFD provider. The CFD provider will define the contract terms, the margin rates and what underlying instruments it is willing to trade. They trade under two different models, which can have an impact on the price of the instrument traded:
Market maker (MM): this is the most common method, and is where the CFD provider makes the price for the CFD on underlying and takes all orders onto its own book. Most CFD providers will hedge these positions based on their own risk model, which may be as simple as buying or selling the underlying, but may also be via portfolio hedges or by consolidating client positions and offsetting one client long with another client short position. This does not affect the CFD trade as no matter what the CFD provider does with its own market risk, the contract is always between the trader and the CFD provider. The main impact is that price can be different to the underlying physical market as the CFD provider can for example take into account other client positions it is holding. This does allow the CFD provider to be very flexible in the products and trading times it offers as it allows them to easily create hybrids and hedge using alternative instruments for example to allow trading out of normal market hours. In practice, the market maker price usually matches the underlying instrument as the CFD provider would otherwise be exposed to arbitrageurs, but some CFD providers add an additional written guarantee in the contract that all CFD prices will match that of the underlying instrument.
Direct market access (DMA) was created in response to concerns that the price in the market-maker model may not match that of the underlying instrument. A DMA CFD provider guarantees that it will do a physical trade on the underlying market to match each CFD trade on a one-for-one basis. The contract is still between the traders and the CFD provider but through this method it is guaranteed that the CFD price is the same as the underlying price and that they will not be re-quoted. They will also be able to see their order in the underlying physical market order book. DMA only works where the underlying instrument can be readily bought and sold in the quantities that match the CFD and is most commonly used for shares CFDs. DMA CFDs can be more expensive as the CFD provider needs to cover the exchange transaction fees and may not be able get economies of scale by netting client orders together. The DMA model is much more like a traditional broker model and is preferred by professional and institutional traders as it avoids conflicts of interest with the CFD provider.

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Leverage
One of the benefits (and risks) of trading CFDs is that they are traded on margin meaning that they provide the trader with leverage. Leverage involves taking a small deposit and using it as a lever to borrow and gain access to a larger equivalent quantity of assets. The margin requirements on CFDs are low meaning that only small amount of money is required to take large positions.
[edit]Stop loss orders
A stop loss order can be set to trigger an exit point as pre-determined by the trader e.g. Buy at $3.00 with a stop loss at $2.60. Once the stop loss is triggered, a sell signal is activated to the CFD provider and actioned in accordance with their terms of business and taking into account available liquidity to action the request. DMA providers typically receive the stop loss value via the phone or online ordering and will place the order in the market to be actioned at the pre-determined price to a limited price range e.g. to a maximum 6c further,and providing there is matching liquidity. If the stop loss price is triggered and the price then rapidly moves outside the 6c range in this example, or there is insufficient liquidity for your order and considering other people that have orders at that price point, your stop loss sell order may not be triggered and you remain in the position.
Market makers have the ability to manage the stop loss and when a stop loss order is triggered, they can close the position wherever they see that matching price and quantity are available. This increases your chances of getting out of a position that is going against you, albeit at a potentially inferior price to what you were expecting.
One of the problems with the price of a stop loss order is that it is only a target price. It depends if the market price actually trades at that level. If the underlying instrument price 'gaps' i.e. it moves past the stop price in one step, the stop will get executed at the next price that was traded or not at all depending on the CFD provider. This is normally not a problem on very actively traded products like indices and currencies, but can be an issue on equity prices, particularly for stocks that have low liquidity. It is also a problem when stock markets are closed, and the difference between the close on one day and the open on the next day is significant (for example: if there has been news about a stock overnight that impacts company profitability).
To mitigate this problem, some providers offer 'Guaranteed Stop Loss Orders' (GSLO) whereby the trader pays a premium for a price to be guaranteed should a stop loss price be triggered. As well as the additional charge, there are normally other restrictions. The closest a guaranteed stop loss order can be placed is typically 5% from the current price and providers usually have specific terms and conditions on the orders however they can be effective if exiting at a set price is important.

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The contracts are subject to a daily financing charge, usually applied at a previously agreed rate linked to LIBOR or some other interest rate benchmark e.g. Reserve Bank rate in Australia. The parties to a CFD pay to finance long positions and may receive funding on short positions in lieu of deferring sale proceeds. The contracts are settled for the cash differential between the price of the opening and closing trades.
Traditionally, equity based CFDs are subject to a commission that is a percentage of the size of the position for each trade. Alternatively, a trader can opt to trade with a market maker, foregoing commissions at the expense of a larger bid/offer spread on the instrument.
[edit]Margin
Traders in CFDs are required to maintain a certain amount of margin as defined by the brokerage or market maker (usually ranging from 0.5% to 30%). One advantage to traders of not having to put up as collateral the full notional value of the CFD is that a given quantity of capital can control a larger position, amplifying the potential for profit or loss. On the other hand, a leveraged position in a volatile CFD can expose the buyer to a margin call in a downturn, which often leads to losing a substantial part of the assets.
CFDs allow a trader to go short or long on any position using margin. There are always two types of margin with a CFD trade -
Initial Margin - (normally between 3% and 30% for shares/stocks and 0.5% - 1% for indices, foreign exchange and commodities)
Variation Margin - (which is then 'marked to market').
Initial margin is fixed at between 0.5% and 30% depending on the underlying product and overall perceived risk in the market at that time. For example, during and after 9/11 initial margins were massively hiked across the board to counter the explosion in volatility in the world's stockmarkets.
Many refer to initial margin as a deposit. For example, for large and highly liquid stocks such as Vodafone the initial margin will be nearer 3%, and depending on the broker and the client's relationship with the firm the deposit maybe even lower. However, with a smaller capitalised and less liquid stock the margin is likely to be at least 10% if not a lot higher.
Variation margin is applied to positions if they move against a client. For example, if a CFD trader was to buy 1,000 shares in ABC stock using CFDs at 100p and the price moved lower to 90p the broker would deduct £100 in variation margin (1,000 shares x -10p) from the client's account. Note, this is all done in real-time as the market moves lower, so called 'marked to market'. Conversely, if the share price moved higher by 10p the broker would credit the client's account with £100 in running profits.
Variation margin can therefore have either a negative or positive effect on a CFD trader's cash balance. But initial margin will always be deducted from a customer's account and replaced once the trade is covered.

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Around 2001 a number of the CFD providers realised that CFDs have the same economic effect as financial spread betting except that the tax regime was different, making it in effect tax free for clients. Most CFD providers launched financial spread betting operations in parallel to their CFD offering. In the UK the CFD market mirrors the financial spread betting market and the products are in many ways the same. However unlike CFDs which have been exported to a number of different countries, spread betting relying on a country specific tax advantage has remained primarily a UK and Irish phenomenon.
The CFD providers started to expand to overseas markets with CFDs being first introduced to Australia in July 2002 by IG Markets and CMC Markets. CFDs have since been introduced into a number of other countries; see list above.
Until 2007 CFDs had been traded exclusively over-the-counter (OTC); however, on 5 November 2007 the Australian Securities Exchange (ASX) listed exchange-traded CFDs on the top 50 Australian stocks, 8 FX pairs, key global indices and some commodities. There were originally 12 brokers offering ASX CFDs, but as of 2009 there are only five.
In June 2009, the UK regulator the Financial Services Authority (FSA) implemented a general disclosure regime for CFDs to avoid them being used in insider information cases.[3] This was after a number of high profile cases where positions in CFDs were used instead of physical underlying stock to hide them from the normal disclosure rules related to insider information.[4]CFDs are traded between individual traders and CFD providers. There are no standard contract terms for CFDs, and each CFD provider can specify their own, but they tend to have a number of things in common.
The CFD is started by making an opening trade on a particular instrument with the CFD provider. This creates a ‘position’ in that instrument. There is no expiry date so the position is closed when a second reverse trade is done. At that point the difference between the opening trade and the closing trade is paid as profit or loss. The CFD provider may make a number of charges as part of the trading or the open position. These may include, bid-offer spread, commission, overnight financing and account management fees.
Even though the CFD does not expire, any positions that are left open overnight will be ‘rolled over’. This typically means that any profit and loss is realised and credited or debited to the client account and any financing charges are calculated. The position then carries forward to the next day. The industry norm is that this process is done at 10pm UK time.
CFDs are traded on margin, and the trader must maintain the minimum margin level at all times. A typical feature of CFD trading is that profit and loss and margin requirement is calculated constantly in real time and shown to the trader on screen. If the amount of money deposited with CFD broker drops below minimum margin level, margin calls can be made. Traders may need to cover these margins quickly otherwise the CFD provider may liquidate their positions.
To see how CFDs work in practice see the examples of typical CFD trades. The ‘margin percentage’, and ‘charges’ shown may vary from provider to provider, but are typical of CFD providers.

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In finance, a contract for difference (or CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead to the seller.) In effect CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.
For example, when applied to equities, such a contract is an equity derivative that allows traders to speculate on share price movements, without the need for ownership of the underlying shares.
CFDs are currently available in the United Kingdom, Hong Kong, The Netherlands, Poland, Portugal, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, Norway, France, Ireland, Japan and Spain. They are not permitted in the United States, due to restrictions by the U.S. Securities and Exchange Commission on over-the-counter (OTC) financial instruments.CFDs were originally developed in the early 1990s in London as a type of equity swap that was traded on margin. The invention of the CFD is widely credited to Brian Keelan and Jon Wood, both of UBS Warburg, on their Trafalgar House deal in the early 90s.[1][2]
They were initially used by hedge funds and institutional traders to hedge their exposure to stocks on the London Stock Exchange in a cost-effective way. Mainly because they required only a small margin and avoided the UK stamp duty tax, as no physical shares changed hands.
In the late 1990s CFDs were first introduced to retail traders. They were popularised by a number of UK companies, whose offerings were typically characterised by innovative online trading platforms that made it easy to see live prices and trade in real time. The first company to do this was GNI (originally known as Gerrard & National Intercommodities); GNI and its CFD trading service GNI touch was later acquired by MF Global. They were soon followed by IG Markets and CMC Markets who started to popularise the product in 2000.
It was around 2000 that retail traders realised that the real benefit of trading CFDs was not the exemption from stamp tax but the ability to trade on leverage on any underlying instrument. This was the start of the growth phase in the use of CFDs. The CFD providers quickly responded and expanded their product offering from just London Stock Exchange (LSE) shares to include indices, many global stocks, commodities, bonds, and currencies. Trading index CFDs, such as the ones based on the major global indexes e.g. Dow Jones, NASDAQ, S&P 500, FTSE, DAX, and CAC, quickly became the most popular type of CFD that were traded.

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In finance, a spread trade is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used. They are executed to yield an overall net position whose value, called the spread, depends on the difference between the prices of the legs. Common spreads are priced and traded as a unit on futures exchanges rather than as individual legs, thus ensuring simultaneous execution and eliminating the execution risk of one leg executing but the other failing.
Spread trades are executed to attempt to profit from the widening or narrowing of the spread, rather than from movement in the prices of the legs directly.[1] Spreads are either "bought" or "sold" depending on whether the trade will profit from the widening or narrowing of the spread.[2]The volatility of the spread is typically much lower than the volatility of the individual legs, since a change in the market fundamentals of a commodity will tend to affect both legs similarly. The margin requirement for a futures spread trade is therefore usually less than the sum of the margin requirements for the two individual futures contracts, and sometimes even less than the requirement for one contract..

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text courtesy of Wikipedia
Financial spread bet example
Suppose Lloyds TSB is trading on the market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p. We use cash bets with no definite expiry, or "rolling daily bets" as they are referred to by the spread betting companies.
If I think the share price is going to go up, I might bet £10 a point (i.e., £10 per penny the shares moves) at 411p. We use the offer price since I am "buying" the share (betting on its increase). Note that my total loss (if LloydsTSB went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.
If a bet goes overnight, the bettor is charged a financing cost (or receives it, if the bettor is shorting the stock). This might be set at LIBOR + a certain percentage, usually around 2/3%.
Thus, in the example, if Lloyds TSB are trading at 411p, then for every day I keep the bet open I am charged [taking finance cost to be 7%] ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)
On top of this, the bettor needs an amount (AKA collateral) in the spread-betting account to cover potential losses. Usually this is either 5 or 10% of the total exposure you are taking on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £ 205.50
If at the end of the bet Lloyds TSB traded at 400-401p, I need to cover that £4110 - £400*10 (£4000) = £110 difference by putting extra deposit (or collateral) into the account.
The bettor will usually receive all dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds TSB goes ex-dividend with dividend of 23.5p. The bettor will receive that amount. The exact amount received varies depending on the rules and policies of the spread betting company, and the taxes that are normally charged in the home tax country of the shares.
[edit]Dangers of financial spread betting
According to an article in The Times dated 10 April 2009 approximately 30,000 spread bet accounts were opened last year, and that the largest study of gambling in the UK on behalf of the Gambling Commission found that serious problems developed in almost 15% of spread betters compared to 1% of other gambling. In addition a report from Cass Business School found that only 1 in 5 punters ends up a winner. As noted in the report, this corresponds to the same ratio of successful punters in regular trading.

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Financial spread betting

By far the largest part of the official market in the UK concerns financial instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations being much less significant.[citation needed] Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being
the "charge" occurs through a wider bid-offer spread;
spread betting has a different tax regime compared with securities and futures exchanges (see below);
spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), and may have guaranteed stop losses (see below); and
the trading is off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared, and is thus subject to a lower level of regulation although the spread betting companies themselves are some of the most regulated entities in the City of London.[citation needed]
Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular the financial derivative Contract for difference (CFD) which in many ways mirrors the spread bet. In fact a number of financial derivative trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.
Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker:
A "stop loss" or "stop" will automatically close the bet if the spread moves against the gambler by a specified amount.
A "stop win", "limit" or "take profit" will close the bet when the spread moves in a gambler's favor by a specified amount.
Spread betting has moved outside the ambit of sport and financial markets (that is, those dealing solely with share, bonds and derivatives), to cover a wide range of markets, such as house prices.[5]
In a falling stockmarket, financial spread betting can also be used by investors as a means of hedging against predicted losses in a portfolio of shares.[6]Tax treatment
In the UK and some other European countries the profit from spread betting is free from tax. The UK and some other European countries tax authorities designate financial spread betting as gambling and not investing, meaning it is free from capital gains tax and stamp tax, despite the fact that its regulated as a financial product by the Financial Services Authority in the UK. Most traders are also not liable for Income Tax unless they rely solely on their profits from financial spread betting to support themselves. The popularity of financial spread betting in the UK and some other European countries, compared to trading other speculative financial instruments such as CFDs and futures is partly due to this tax advantage. However, this also means any losses cannot be offset against future earnings for tax calculations.
Conversely, in most other countries financial spread betting income is considered taxable. For example the Australian Tax Office issued a decision in March 2010 saying "Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA 1997".[7] Similarly, any losses on the spread betting contracts are deductible. This has resulted in a much lower interest in financial spread betting in those countries.

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text courtesy of Wikipedia
Spread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, such as fixed-odds (or money-line) betting or parimutuel betting. A spread is a range of outcomes and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, with the number of gamblers heading towards one million.[1] Spread betting carries a high level of risk, with potential losses or gains far in excess of the original money wagered.[2] In the UK, spread betting is regulated by the Financial Services Authority rather than the Gambling Commission.[3]The general purpose of spread betting is to create an active market for both sides of a binary wager, even if the outcome of an event may appear a priori (prima facie) to be biased towards one side or the other. In a sporting event a strong team may be matched up against a historically weaker team; almost every game will have a favorite and an underdog. If the wager is simply "Will the favorite win?", more bets are likely to be made for the favorite, possibly to such an extent that there would be very few betters willing to take the underdog.
The point spread is essentially a handicap towards the underdog. The wager becomes "Will the favorite win by more than the point spread?" The point spread can be moved to any level to create an equal number of participants on each side of the wager. This allows a bookmaker to act as a market maker by accepting wagers on both sides of the spread. The bookmaker charges a commission, or vigorish, and acts as the counterparty for each participant. As long as the total amount wagered on each side is roughly equal, the bookmaker is unconcerned with the actual outcome; profits instead come from the commissions.
Because the spread is intended to create an equal number of wagers on either side, the implied probability is 50% for both sides of the wager. In order to profit, the bookmaker must pay one side (or both sides) less than this notional amount. In practice, spreads may be perceived as slightly favoring one side, and bookmakers will often revise their odds in order to manage their event risk.

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Example of a binary options trade

A trader who thinks that the EUR/USD strike price will close at or above 1.2500 at 3:00 p.m. can buy a call option on that outcome. A trader who thinks that the EUR/USD strike price will close at or below 1.2500 at 3:00 p.m. can buy a put option or sell the contract.
At 2:00 p.m. the EUR/USD spot price is 1.2490. the trader believes this will increase, so he buys 10 call options for EUR/USD at or above 1.2500 at 3:00 p.m. at a cost of $40 each.
The risk involved in this trade is known. The trader’s gross profit/loss follows the ‘all or nothing’ principle. He can lose all the money he invested, which in this case is $40 x 10 = $400, or make a gross profit of $100 x 10 = $1000. If the EUR/USD strike price will close at or above 1.2500 at 3:00 p.m. the trader's net profit will be the payoff at expiry minus the cost of the option: $1000 – $400 = $600.
The trader can also choose to liquidate (buy or sell to close) his position prior to expiration, at which point the option value is not guaranteed to be $100. The larger the gap between the spot price and the strike price, the value of the option decreases, as the option is less likely to expire in the money.
In this example, at 3:00 p.m. the spot has risen to 1.2505. The option has expired in the money and the gross payoff is $1000. The trader's net profit is $600.
[edit]Black-Scholes Valuation

In the Black-Scholes model, the price of the option can be found by the formulas below.[12] In these, S is the initial stock price, K denotes the strike price, T is the time to maturity, q is the dividend rate, r is the risk-free interest rate and is the volatility. denotes the cumulative distribution function of the normal distribution,

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Exchange-traded binary options

In 2007, the Options Clearing Corporation proposed a rule change to allow binary options,[1] and the Securities and Exchange Commission approved listing cash-or-nothing binary options in 2008.[2] In May 2008, the American Stock Exchange (Amex) launched exchange-traded European cash-or-nothing binary options, and the Chicago Board Options Exchange (CBOE) followed in June 2008. The standardization of binary options allows them to be exchange-traded with continuous quotations.
Amex offers binary options on some ETFs and a few highly liquid equities such as Citigroup and Google.[3] Amex calls binary options "Fixed Return Options"; calls are named "Finish High" and puts are named "Finish Low". To reduce the threat of market manipulation of single stocks, Amex FROs use a "settlement index" defined as a volume-weighted average of trades on the expiration day.[4] The American Stock Exchange and Donato A. Montanaro submitted a patent application for exchange-listed binary options using a volume-weighted settlement index in 2005.[5]
CBOE offers binary options on the S&P 500 (SPX) and the CBOE Volatility Index (VIX).[6] The tickers for these are BSZ[7] and BVZ,[8] respectively. CBOE only offers calls, as binary put options are trivial to create synthetically from binary call options. BSZ strikes are at 5-point intervals and BVZ strikes are at 1-point intervals. The actual underlying to BSZ and BVZ are based on the opening prices of index basket members.
Both Amex and CBOE listed options have values between $0 and $1, with a multiplier of 100, and tick size of $0.01, and are cash settled.[6][9]
In 2009 Nadex, the North American Derivatives Exchange, launched and now offers a suite of binary options vehicles.[10] Nadex binary options are available on a range Stock Index Futures, Spot Forex, Commodity Futures, and Economic Events.
Binary option trading is now an international industry. It is most widely recognized in the United States, but is increasing gaining popularity in the Middle East, Western Europe, Australia and Asia.[11]

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Binary options are high risk financial instruments where a prediction is made regarding the price of an asset at a certain period of the day. The predictions made relate to very small price modifications, which are extremely hard to predict, hence the high risk factor.
In finance, a binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. Thus, the options are binary in nature because there are only two possible outcomes. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and Fixed Return Options (FROs) (on the American Stock Exchange). Binary options are usually European-style options.
For example, a purchase is made of a binary cash-or-nothing call option on XYZ Corp's stock struck at $100 with a binary payoff of $1000. Then, if at the future maturity date, the stock is trading at or above $100, $1000 is received. If its stock is trading below $100, nothing is received.
In the popular Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function.