Platinum Contracts for Difference

How Contracts for Difference Work

Contracts for difference, or CFDs, are contracts which exist between traders and brokers offering these contracts, where the broker covers the difference that the trades produce during the holding period that the trader has selected.

For instance, if you enter a long position with platinum in a CFD trade, it will be offered at a certain price, where it will be purchased in the desired amount. Later, when the position is closed, it will close at a certain price, and the trader’s account will be credited or debited by the amount of the difference.

This is similar to the futures market in several ways, but offers some advantages over futures trading. Contracts for difference are not available to traders in every country, and some countries such as the United States prohibit them, although there is no substantial good reason to do so.

The rationale behind the U.S.’s prohibition of contracts for difference goes back to the early days of securities trading, where shops used to take positions from traders with the promise of settling the trades later. Some of these shops, called bucket shops, weren’t that reputable, and were also completely unregulated, so this type of trading was certainly risky and in need of proper regulation.

Modern day contracts for difference brokers are now regulated though, although they do differ in quality and it is important to select a contracts for difference broker that not only can be trusted but offer enough liquidity and also offer competitive spreads. There are a lot of contracts for difference brokers out there, some very large, some smaller, and it certainly does pay to shop around here.

If a broker is going to take your trade and assume full responsibility for it, then it is obviously important that they have the means to take on these risks and be completely reliable. This is generally the case although there is always counterparty risk in a trade, the risk that a party may not fulfill its financial obligations to you, although the same government sponsored insurance schemes protecting against default generally apply to contracts for difference brokers as well, provided that they are regulated in the country that you reside.

Aside from regulatory protection, the nature of the contracts for difference business, the very high leverage that these contracts allow, requires the broker to have access to significant amounts of capital, and this requirement in itself will ensure that CFD broker will be using a stable business model, since they need to either have or be able to borrow the high margin that is being provided their clients.

The Benefits of Trading Platinum CFDs

There is nothing easier than placing trades for contracts for difference with an online broker, and this is even easier and more efficient than placing trades for futures. Futures contracts for instance require that one trade a certain number of contracts, for instance 50 ounces of platinum, where contracts for difference can involve any fractional amount, without the burden of minimums.

If you want to place a CFD trade for $10 worth of platinum on the futures market, for a particular futures expiration date, or even if you want to place the trade on the platinum cash market, you can easily do so. This allows the amount of the trade to be perfectly tailored to each trade, as long as the maximum limits aren’t exceeded that is.

With futures trading, you are limited to trading full contracts, there is no fractional trading permitted, or trading based upon the amount of money that you want to use in the trade, which does restrict things.

CFD brokers do have maximum limits, as they seek to limit their exposure in a certain trade and to a certain client, but these limits tend to be pretty high. One can, for instance, control over $100,000 worth of platinum in a single trade, and control several times more than that through stacking trades.

Depending on the quantity of platinum desired with a CFD platinum trade, one may pay larger spreads, the same way as you would with larger orders of pretty much anything. You may see for instance a certain price at the best offer for 100 units for instance, with each unit representing 10 ounces of platinum, and if you’re looking to control more than 1000 ounces in a single trade you will have to pay a little higher price.

Spreads with contracts for difference can range considerably between different CFD brokers, and spreads are offered as low as $1 an ounce, with some brokers charging more than others. Spreads are a very important consideration, although not the only one, in selecting a CFD broker, and friendlier spreads with CFD trading can make a big difference in your trading bottom line, especially for more frequent traders.

Provided one selects a good CFD broker, one can be in a position to trade platinum along with thousands of other securities in a single click, and the inventory and different things to trade with the better CFD brokers is wide ranging indeed, involving virtually anything that a trader would want to trade, including forex, from a single account and from a single software platform.

Given all this, it is not surprising at all that CFD trading has become so popular these days, and while many traders and investors may not be that familiar with it, it is catching on fast.

Trading Platinum Contracts for Difference

While platinum futures provide much more leverage than buying and selling physical platinum or buying shares in a platinum ETFs, where with futures you can control roughly 10 times more platinum than you are putting up the money for, platinum contracts per difference can take this to a whole new level, where in some countries, with some brokers, you can leverage your position up to 1000 times.

This is an absurd amount of leverage though, no matter how good of a trader you may be, and no one in their right mind would expose their trading portfolio anywhere this much leverage, as even very slight movements will involve you not only losing your entire amount, it would also expose you to potentially losing more than your investment.

Even though CFD brokers would close your positions due to margin calls, by the time they are closed, your position can go considerably lower than zero if trades are ridiculously leveraged.

With this said, there is more flexibility to set your leverage to levels you are comfortable with, which may mean levels higher than futures trading allow but not so high as to expose yourself to risks that are or should be considered simply unacceptable.

Many new CFD traders are lured by the appeal of margin rates such as 500:1 or 1000:1 but this is simply way too much margin for anyone really. Brokers are happy enough to see traders lose their whole position though so they do offer these margin rates but sensible traders need to avoid exposing theme selves to these degrees.

Still though, if one is truly looking to gamble, one may still engage in such trades, as long as they are aware of the risks. Often times, one becomes sufficiently aware only after one or more disastrous trades, and it is of course preferable to learn your lessons at far less expense than this.

When used responsibly, platinum and other contracts for difference trades can allow skilled traders the benefit of amplifying their positions to virtually any degree they desire, or at least should desire, and therefore look to leverage whatever trading advantage they have to an ideal level.

You can miss both on the low and the high side here, not leveraging enough as well as leveraging too much, and with contracts for difference, this at least puts you more in control of these limits than having to conform to the more restrictive rules of futures trading.

There is no real trade going on here between you and the market, and brokers can but often do not even cover your position in the market, and will often just take the other side of the trade with a positive expectation, if your expectation is a negative one. This allows them to often not only make the full spread involved but capitalize on the mistakes of their traders as well, and most traders are net losers even with the spread deducted, due to their lack of proper skill.

They do often purchase the assets contracted for on the market, but more with a view of managing their own risk, not as any requirement.

Is Platinum CFD Trading a Good Idea?

CFD trading is generally the least conservative and therefore the riskiest way to trade platinum, as well as anything else, and if one needs to be more cautious in trading platinum futures than with trading physical platinum, this goes double or more with platinum CFD trading.

The biggest risk here to traders is that they will overestimate their trading advantage, and you can get into trouble trading platinum CFDs even with a significant trading advantage if you expose yourself to too much drawdown risk, which can easily happen with CFDs.

This can be managed though and even though a given trade may involve a lot of leverage, this does not mean that one’s funds in the account need to be so exposed, as one can simply trade a smaller proportion of it to achieve whatever desired overall leverage and risk exposure one wishes.

Like futures trading, contracts for difference trading can as readily go short as long, and you simply choose what side you want to place your trade on and then click. Most CFD traders offer one click trading where one can trade predetermined sizes and even predetermined stop levels in an instant.

CFD trading is perhaps the most efficient form of trading out there, as you are dealing directly with the market, because the market for these trades is in house, and does not require any external trades or agents to complete.

The ability to specify the exact size of the contract is another big benefit, compared to the futures market where contracts are of a specific size, often a larger one than many traders wish or are able to engage in. This also offers traders the advantage of being able to trade fractionally, where for instance the decision isn’t between whole numbers such as 1 or 2 contracts, where one may not want to trade 2 and is therefore stuck with one, as 1.5 contracts or any amount in between can be traded with a CFD.

Those of both very small and very significant means can therefore trade platinum contracts for difference, and CFDs involve few limitations. They are also suitable for any trading timeframe, anywhere from being in a trade for seconds to longer term holdings. Those looking to invest in platinum longer term do need to be aware that the available margin does involve borrowing at margin rates though, and this needs to be accounted for in one’s strategy.

Contracts for difference can be a fabulous way to trade platinum though for those who truly have the skill to do so with a big enough advantage, where successful speculation will be rewarded more handsomely and even much more so than trading in actual platinum. The risks are more significant as well though so that has to be properly taken into account when deciding if platinum CFDs are right for you.