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Technologygives your trading a head start

David Jones

THESE days, contracts for difference (CFDs) are most often seen as an efficient way of opening positions and building positions that are held for several months. At the moment, though, with crystal balls in short supply and the future uncertain, traders might be wary about making trades that rely on predicting trends. Which is why now is a good time to remember that CFDs were originally designed with the short-term trade in mind.<br /><br />Many of their fundamental features, such as the lack of stamp duty, minimal commission fees, tight spreads and sophisticated online dealing systems make it possible to jump in and out of the market on a very frequent basis if required.<br /><br />If you are a CFD trader wanting to do just this, and can balance the risk of additional transaction costs, then rather than just working with a market maker you can add two extra pieces of functionality to your trading &ndash; level two data, and direct market access (DMA) &ndash; which may help to make the difference between a winning and a losing trading plan. <br /><strong><br />TWO-WAY PRICE<br /></strong>Level two data, depending on what level of service you choose, allows you to see either the next five prices where traders have queued orders at, or even the entire order book. A basic account is likely to only give you an indicative two-way price &ndash; a price at which traders are willing to let you buy a stock at, and a price at which you can sell. <br /><br />As an example, XYZ plc may currently be trading at 199.50p-199.60p but the level two data may show that there are a number of participants with orders queued to sell at 200p. In light of this information you may expect the share price to touch 200p then retreat as the queued orders are placed into the market. <br /><br />The problem with this is that it does not offer any insight into the order book, so you have no idea as to how the thousands of other market participants are positioned at any one time. Understandably, this could have a significant bearing on where the price moves, at least in the short-term, and is therefore an important piece of information for CFD traders looking to scalp a few points of profit.<br /><br />This level two data will also show you just how big an order you can expect to place successfully at the quoted price &ndash; if buyers are only willing to purchase 1,000 shares at 199.50p, any attempt to sell more than this may see part of the order not being filled in the way that you would have expected. Having this information at your fingertips can inform both the direction and the size of your short-term CFD trading. <br /><strong><br />JUMPING IN<br /></strong>CFD traders jumping in and out of the markets will also find the price transparency of dealing directly with the underlying market rather than placing your orders through a market maker very attractive as a means of achieving the best price. <br /><br />While a market maker will always offer you that indicative two-way price, you are to an extent still trading blind. In a fast-moving market, you may request to sell when the market maker is quoting you 199.50p, but nonetheless find that the price you actually achieve is some way below that. When you are looking to eke a few points here or there, this can eat into your profit quite significantly. <br /><br />This is where DMA comes in. This allows CFD traders to queue and monitor their deals in the order book, which gives both transparency and flexibility. Firstly, if your order is queued and the market is moving unfavourably, you can see this and decide whether or not to cancel your order. <br /><br />Furthermore, the ability to trade inside the spread is also open to those trading DMA, which gives you the opportunity to find a counterparty who may be willing to offer you better than market price on a stock. <br /><br />Finally, DMA also allows you to participate in auctions, both within and outside of normal market hours. Bear in mind that you will of course be dealing against professionals, and your DMA provider is also unlikely to be sympathetic if you make a fat finger error. And remember that CFDs are leveraged products and you can lose more than your initial deposit. <br /><br />Historically, only the biggest financial institutions used to be able to benefit from DMA and level two functionality. But the revolution that started with Big Bang over 20 years ago combined with the vast improvements in technology that we have seen, mean that this level of detail is now available on a far wider basis. <br /><br />Not all CFD providers offer you DMA, and unsurprisingly, this level of access and functionality can carry some small premiums. For short-term trading, though, it&rsquo;s a boon to say the least. Worth considering, if that crystal ball is still proving elusive. <br /><br />David Jones is Chief Market Strategist at CFD provider IG Markets. Go to http://www.ig.com/uk/seminars for an online demonstration of IG&rsquo;s PureDMA.