Is CFD trading legal in United Kingdom?
Yes, it’s legal, CFD were actually invented in the UK, and first adapted there. They were invented in the early 1990s, by city bankers as a way to bring innovation to financial trading. The original needs were for short term speculation and for hedging of risk. But CFDs were very successful and so much more efficient, that they became mainstream trading tools. So by the late 90s not just bankers, but all retail traders could have access to CFD trading.
CFD is superior to other alternatives such as spread betting or futures. Both spread betting and futures are priced based on forward market concepts, and the contracts you trade do not follow closely the price of the underlying market. Moreover spread betting is inefficient for most trading strategies. CFD on the other hand provide far superior linearity, it’s just like trading the real underlying market, in terms of price movement. And this is especially useful in commodity trading. But CFDs are also very liquid, and that’s why they offer even more efficiency and trading speed than spread betting.
CFD are classed in the same category as stocks, so any income arising from CFD trading is taxed. But it makes no difference, CFD are still better than both spread betting or futures. And spread betting is a fools game in the UK, claiming to be tax free, but in reality there’s hidden tax in the form of wider spreads. CFDs are winning more and more ground over both spread betting and futures in the UK. And I believe that things will improve even more in the future, as CFD brokers are very determined to offer even better services. The trading of the future will be determined by the following factors:
- Range of markets offered to clients
And CFD brokers are leading the way on all fronts, there’s no way that someone will go back to spread betting or futures, because CFDs always offer more and better things. Futures are still useful to large size traders, such as banks and large companies. But CFDs are best for small size, retail traders, and they are this good for trading up to $100 per point! There’s nothing better for a retail trader to do, but to choose CFDs.
How to make money on CFD trading in United Kingdom
Most CFD traders in the UK are former stock traders, or traders of various backgrounds, including investing, commodity trading and other more advanced strategies. Some of these traders make a lot of money from their CFD trading every week. UK traders are specialists, and prefer to focus on few markets that they understand best, and trade those markets every week. I say every week, because their strategy is based on the weekly period, regardless if their trades last few minutes, hours, days, or longer.
So it’s important for you too, to focus on few markets, and prepare your strategy each and every week. If you already understand UK share trading and investing, then I believe it’s a good idea to start combining CFD trading together with share investing. CFDs can help immediately improve such investment strategies. If you are someone who doesn’t have a clear guidance in trading, then I recommend that you study market correlation patterns first, and how commodities and currencies impact each other. It is a mistake to treat commodities as one thing, currencies as another, and stocks as yet another separate market. All kinds of markets in some cases influence each other.
You can also make money through social trading, which is offered by some top CFD brokers in the UK. In this case you simply choose the traders you want to follow, and then automatically you copy their trades. The idea of social trading has been debated by critics and advocates. And it seems that it is actually possible for beginners and novices to actually make around 30% per year. That is 30% annual profit, from social trading alone, without making any trade decisions at all. Social trading still requires some decisions on choosing your signal provider, and it’s better to focus on the following:
- Signal provider has to trade frequently
- Signal provider needs to have 6 months of trading history
- Signal provider needs to have low, but not too low drawdown
I do however disagree with the lazy approach of 100% automated social trading. I think it’s better to use social trading, as a way to see how other traders would trade the same markets that you want to trade. And actually see how these good traders think, and then compare their ideas to your own trading strategy. This will help you become active and start developing some serious trading strategy, upon which you can rely later on. Ultimately, the objective for all beginners should be to become better than their mentors. It’s important to learn to think outside the box, and to take calculated risks. All CFD traders I know in the UK, who make $10,000 or more per week, did develop their own strategies.
Social trading is good, it will make you some profit, but not $10,000 per week, there are natural limitations. Nonetheless, social trading is a good way to make some money and to check your own trade ideas.
List of Registered CFD Brokers in UK
There are many CFD brokers in the UK, regulated by the Financial Conduct Authority (FCA), the tops ones are reviews here. These brokers offer all the tools a UK based trader will ever need, at all levels… from beginner to very advanced and through to social trading. Remember that many of them also offer cryptocurrency trading through CFDs. This is a whole new market for them, expected to be as important as classic commodities. And it’s good for traders too, since regulated UK broker offer top safety and reliability, as well as trading efficiency, which the online cryptocurrencies of today cannot provide.
Funds held in a CFD account, are kept under regulatory policy and through segregated banking, and moreover the funds cannot be stolen by hackers, not in a million years. Whereas cryptocurrency exchanges are not as secure, and they are not as efficient. That’s why a $500 cryptocurrency trader will use the online exchanges, but a $10,000 crypto currency trader doesn’t feel comfortable leaving so much money online, and will use CFD trading instead. It can be done at low or zero leverage, through a good CFD broker, and this trader will be able to trade much better and much more safely this way.
Some Top CFD Brokers Who Accept UK Traders:
24option CFD Broker
This is a regulated broker offering both binary options and CFDs. It also offers modern trading platforms and even free trading signals. It suits the needs of many types of traders.
Plus500 CFD Broker
This is a regulated CFD broker, offering many classic markets and now it also offers many cryptocurrencies as well, all through CFDs. In addition it offers guaranteed stops, which is useful for some strategies.
CMSTrader CFD Broker
This is a regulated, highly professional CFD broker aimed at the more professional trader. It offers many trading tools, many markets and advanced social trading. It also offers swap free accounts.
AvaTrade CFD Broker
This is one of the earliest CFD brokers, regulated and well rated. It offers all the markets a trader will ever need, including popular cryptocurrencies now, and an advanced version of MetaTrader4 which is web based and accessible from any device.
eToro CFD Broker
This is a regulated CFD broker which offers the biggest social trading tool available today, and one of the best if not probably the best. It’s very good for beginners especially. Minimum deposit is very low, just $50 and everything is easy for the beginner.
What Really Matters
In CFD trading you should plan your strategy based on what you think, and you should keep away from market news, and all kinds of things that are likely to confuse you. Only market charts and indicators should be used. Most traders I have seen fail, failed because they tried too many different things at once and because of trading on the news.
- News cannot help predict market direction
- News is not really a binary event (up or down)
- News is only a volatility indicator and nothing more
Markets can go up on bad news, and they can go down on good news, don’t even think about using naïve logic to analyze the markets, because it won’t work. If markets could be predicted using such analysis, such as the media want to have you believe, then trading would be super easy. And everyone would be able to calculate the next price level, and there would be no volatility and risk, and markets would not really move. And it would be impossible to trade them. Which is not what markets are supposed to be. So learn to doubt market opinion, especially opinions of economists on TV, they are wrong all the time.