1. Home
2. Day Trading in the UAE

CFD Trading In The UAE

Written By

Paul Holmes

Written By

Paul Holmes

Paul has over 14 years experience in the trading industry, both as a full-time trader and working with leading brokers. He’s traded indices and forex, developed proprietary day trading techniques, and built his own MetaTrader algorithms. He excels at delivering simple-to-follow guides for beginners to experienced traders.  

» Paul Holmes Profile Page

Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Fact Checked By

Michael MacKenzie

Fact Checked By

Michael MacKenzie

Michael is a writer and editor with over a decade in journalism and publishing. His niche lies in editing and fact-checking content in the financial services sector, with a focus on online brokers and trading platforms. Michael previously reported on politics and economics in the Middle East and edits books for established publishers.

» Michael MacKenzie Profile Page

Updated

Oct 28, 2024

Contract for difference (CFD) trading offers a flexible way to speculate on the price movements of global and Middle Eastern assets like stocks, commodities, and indices – without owning them.

In the UAE, CFDs have gained popularity, especially among investors interested in digital assets. According to Investment Trends, 24% of new CFD traders in the Emirates start with cryptocurrencies.

This beginner’s guide will explore the risks and rewards of CFD trading in the UAE, taking you through a detailed trade to help you make smarter decisions.

Quick Introduction

• With CFDs, you don’t actually own the asset you’re trading, for example shares in First Abu Dhabi Bank. This can be a big advantage, as it means you avoid many of the costs and complexities of ownership.
• CFDs let you trade with leverage, meaning you can open larger positions with a smaller amount of capital. This magnifies both potential profits and losses, giving you more flexibility but requiring strict risk management.
• One of the big draws of CFDs is that you can make money whether the market is going up or down. You’re not tied to just buying and waiting for prices to rise; you can also “short” the market if you think prices will fall.

How Does CFD Trading Work?

CFD trading allows you to trade financial markets without the added expense of owning the actual assets.

Leverage is an attractive element of CFD trading. It lets you open larger positions while only committing a fraction of the total value or margin needed to buy the equivalent amount of shares listed on UAE stock markets, for example.

Consider a potential trading scenario using a CFD to trade a popular UAE index. The ADX General Index is a leading share market index and contains the top Abu Dhabi Securities Exchange companies by float-adjusted market capitalization.

If you believe the FTSE ADX will rise, you enter a CFD buy (long) position. Suppose each contract is valued at AED 9,300, and your brokerage requires a 5% margin, then taking a position on 10 contracts. In that case, you’d need a margin requirement of United Arab Emirates dirham (AED) of 4,650 (9,300 per contract x 10 contracts x 5%).

If the FTSE ADX rises to 9,400, the price increase would yield AED 100 per contract. By closing your position, you could bag a total profit of AED 1,000 (10 contracts x AED 100), excluding any brokerage fees.

Alternatively, if the index falls to AED 9,200, you could lose AED 1,000, illustrating the risks involved with CFD trading; despite getting to control significant size with leverage, gains and losses are amplified.

Knowing how margin and leverage work is crucial to your future success.

If you’re new to CFD trading, consider opening a demo trading account before committing to trading real funds. Demos are an excellent introduction to the complexities of CFD trading before you take on financial risk.

Paul Holmes

Author

What Can I Trade? 

CFDs offers many trading opportunities on various financial markets, both in UAE and internationally:

• Stock CFDs – You could trade individual UAE stocks listed on the ADX using CFDs without the extra commitment of buying the shares.
• Index CFDs – The ADX General Index (FTSE ADX) is the UAE’s leading share market index. Traders often prefer to trade index CFDs to capitalize on a stock exchange’s overall market performance rather than trade in individual shares. Alternatively, you might want to consider trading CFDs on global indices like the Dow Jones or the NASDAQ, as the trading costs are generally very competitive.
• Forex CFDs – The United Arab Emirates dirham (AED) can be traded as a minor/exotic currency pair in the foreign exchange market. Currency pairs involving AED include USD/AED and EUR/AED. However, due to the lack of liquidity and availability, the cost of trading such pairs can be uneconomical, and trading conditions are more volatile than those of major pairs like GBP/USD and EUR/USD.
• Commodity CFDs – Critical commercial commodities like gold, silver, and crude oil can be traded as CFDs, allowing you to speculate on the price movements of these vital resources.
• Crypto CFDs – The fascination surrounding digital asset trading is particularly prominent in the UAE, attracting many newcomers. You can trade cryptocurrency CFDs like Bitcoin and Ethereum, allowing access to the volatile and exciting world of crypto.

Is CFD Trading Legal In The UAE?

CFD trading is legal in the UAE but governed by strict regulations to ensure investors’ safety and the market’s transparency.

The Securities And Commodities Authority (SCA) regulates financial markets in the UAE, including CFD trading. It ensures that brokers follow rules designed to protect investors and monitors the activities of CFD providers to ensure they provide fair and transparent services.

The Dubai Financial Services Authority (DFSA) is the regulatory body for the Dubai International Financial Centre (DIFC), a free zone that operates as a financial hub within the UAE.

The DFSA creates regulations for companies and brokers based in this free zone. These regulations are typically aligned with international standards, adding another layer of protection for traders.

The Abu Dhabi Global Market (ADGM) is another important financial hub within the UAE, similar to DIFC, and regulates its own set of CFD brokers.

Any broker offering CFD trading in the UAE must be licensed by one of these regulatory bodies: the SCA for brokers operating in the broader UAE market or the DFSA for those operating within the DIFC. Some of the key requirements for licensed firms include:

Is CFD Trading Taxed In The UAE?

One of the significant advantages for traders in the UAE is its tax-friendly environment.

The UAE does not impose personal income tax or capital gains tax on profits from trading, including CFDs.

There are a few things to keep in mind:

1. No Capital Gains Tax: Since there is no tax on capital gains, any profit you make from CFD trading, including from short-term positions, won’t be subject to taxation.
2. No Income Tax: The UAE also doesn’t have a personal income tax, so even if CFD trading becomes a significant source of income for you, it remains untaxed.
3. Corporate Tax: From June 2023, the UAE introduced a corporate tax of 9%, but this applies only to businesses generating over AED 375,000 in profit annually. If you are trading as an individual, this tax won’t apply to you. However, if you are trading CFDs through a registered business or company structure, you may want to consult a tax advisor to understand if corporate tax applies.
4. Stamp Duty and Other Fees: Since CFDs don’t involve ownership of the underlying asset (such as shares or commodities), you typically avoid additional costs like stamp duty, which would otherwise apply to physical asset ownership in some countries.

An Example Trade

Here, I will examine an opportunity to trade a popular index in UAE, the ADX General Index (FTSE ADX).

If you’re unfamiliar with a specific stock market and its shares, trading a leading index can be an excellent alternative. Providers generally offer reasonable trading costs for indices, and the liquidity can be high.

Fundamental Analysis

The fundamental analysis you’ll apply to trading an index is similar to that of trading forex pairs and commodities.

For example, I look at global macroeconomic events and the country-specific events listed on my economic calendar. I also consider metrics like unemployment, GDP, government borrowing, inflation, etc., as you would with currency pairs.

Technical Analysis

When trading an index, I usually do so on a swing trading basis. So, I typically apply technical indicators on my chart that work best to identify trend, momentum, volatility, entry/exit points, velocity, and oversold/overbought conditions.

The stochastic oscillator, MACD, and RSI provide all this feedback, especially when paired with a candlestick option like Heikin Ashi (HA), which clearly illustrates price action.

4 Hour Timeframe

If I analyze the chart below, we can see two well-defined periods, the downtrend and the uptrend. The uptrend has paused and entered a ranging (holding) period. I’m concentrating on this current market condition as I’m convinced the ranging period is nearing its end.

In the previous downtrend, the technical analysis was textbook perfect. The Heikin Ashi candles were full and bearish with small shadows (wicks), indicating that the bearish sentiment gained momentum.

The signal to enter short would have been when the stoch lines crossed after the MACD moving averages crossed and the RSI crossed the median 50 level in a downward motion.

I’m waiting for the signal to enter the long trade based on a complete reversal of the conditions for a short trade; I need the stoch lines, MACD moving averages, and the RSI to align to take the trade.

This is especially critical when the market ranges, as it has been over recent trading sessions. I’m waiting for the stoch lines (%K: The primary, faster-moving line and %D: A three-period moving average of the %K line) to cross before entering the market.

Remember that if you create a trading plan that includes your rules to enter and exit, you shouldn’t breach them. Trading discipline is critical to long-term success. Without rules and a plan, you’re reducing trading to guessing.

I will risk no more than 1% of my trading account on this trade and must commit a 5% margin.

To buy 10 full contracts, I need roughly AED 9,300 x 10 x 5% = AED 4,650, approximately $1,270.

Paul Holmes

Author

My stop loss will be positioned at 9115, the recent low and the point at which my trade direction analysis will be proven wrong.

But bear in mind that if the long trade doesn’t go my way, this stop may be cancelled early if I receive a signal via my technical indicators to reverse and go short.

Bottom Line

CFD trading offers a flexible and potentially profitable way to access global markets from the UAE, with benefits like leverage, diverse asset classes, and tax-free profits. However, it’s crucial to trade cautiously, as leverage can magnify gains and losses.

Use a regulated broker (SCA or DFSA) to protect your investments and ensure you understand the risks involved. The UAE provides a favorable and well-regulated environment for CFD trading, but informed, responsible decision-making is key to success.

To get going, make use of DayTrading.com’s pick of the top platforms for day trading CFDs.

Recommended Reading