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CFD Trading In Australia

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 21, 2024

Do you want to trade upward or downward price movements in markets like Australian shares without owning the underlying asset? Cue contracts for difference, or CFDs, which give you access to a range of Australian and global markets while amplifying trading results.

CFD trading has exploded in Australia since it was introduced in 2002, but it operates under increasingly strict oversight from the Australian Securities & Investments Commission (ASIC).

This beginner’s guide to CFD trading in Australia unravels the basics every day trader should know.

Quick Introduction

• No ownership, no baggage: Because you’re trading contracts, not the actual assets, there’s no need to worry about ownership or physical delivery. That means no stamp duty on shares, no hassle with paperwork, and you can still benefit from price movements.
• Trade in any market direction: One of the most appealing features of CFD trading is the ability to profit whether markets go up or down. You can “go long” if you think prices will rise or “short” if you expect a drop. It’s like having the flexibility to play both sides of the market, giving you more chances to catch opportunities.
• Get more bang for your Aussie buck: With CFDs, you don’t need the total amount of the trade upfront. Leverage allows you to control a larger position with a smaller deposit, meaning you can potentially amplify your gains. But leverage works both ways; it can boost profits and magnify losses.
• Robust regulation: CFD trading is tightly regulated by the Australian Securities & Investments Commission (ASIC), a ‘green tier’ body in DayTrading.com’s Regulation & Trust Rating, mandating strict safeguards like 1:30 leverage for retail investors.

All CFD Brokers in Australia

How Does CFD Trading Work?

CFD trading lets Australian investors trade financial markets without the added expense of owning the actual assets.

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

Let’s look at a potential trading scenario using a CFD to trade a popular Aussie index, the S&P/ASX 200, commonly called the ASX 200. The S&P/ASX 200 (XJO) is Australia’s leading share market index and contains the top 200 ASX-listed companies by float-adjusted market capitalization.

If you’re convinced the ASX 200 will rise, you’d enter a CFD buy position. If each contract is valued at AUD 8,300, and your brokerage requires a 5% margin, then to take a position on 10 contracts, you’d need a margin requirement of AUD 4,150 (8,300 per contract x 10 contracts x 5%).

If the ASX 200 rises to 8,400, the price increase would yield AUD 100 per contract. By closing your position, you could realize a total profit of AUD 1,000 (10 contracts x AUD 100), excluding any fees your broker charges.

However, if the index falls to 8,200, you would lose AUD 1,000, illustrating the risks involved with CFD trading; although you get to control significant size with leverage, gains and losses are increased.

Getting to know how margin and leverage work is fundamental to your future success.

If CFD trading is new to you, why not consider opening a demo trading account? It’s an excellent introduction to practice strategies and builds your confidence before you risk real money.

Paul Holmes

Author

What Can I Trade? 

CFD trading in Australia gives you numerous trading opportunities across several financial markets, both in Australia and globally:

• Stock CFDs – You can trade individual Aussie stocks listed on the ASX using CFDs. These highly liquid, popular, and well-capitalized stocks can be traded as CFDs without the added expense of purchasing the shares.
• Index CFDs – The S&P/ASX 200 (XJO) is Australia’s leading share market index. It is a market capitalization-weighted index that includes a significant portion of all listed companies on the ASX. Traders often choose index CFDs to speculate on a stock exchange’s overall market performance rather than trade individual shares. Alternatively, why not consider CFDs on global indices like the Dow Jones or the NASDAQ, as the trading costs are generally competitive?
• Forex CFDs – The Australian dollar, AUD, is actively traded in the foreign exchange market. Popular currency pairs include AUD/USD and AUD/NZD. These pairs are liquidity-rich and provide opportunities for short-term traders.
• Commodity CFDs – Vital commercial commodities like gold, silver, and crude oil can be traded as CFDs, allowing you to speculate on the price movements of these crucial global resources.
• Crypto CFDs – The fascination surrounding digital asset trading has reached Australia, too. Retail investors can trade cryptocurrency CFDs like Bitcoin and Ethereum as CFDs, giving you access to the volatile world of crypto.

Is CFD Trading Legal In Australia?

CFD trading is legal in Australia and tightly regulated by the Australian Securities and Investments Commission (ASIC).

ASIC oversees CFD brokers to protect retail traders and ensure the trading environment is transparent and fair. ASIC has implemented specific measures to mitigate the risks for everyday traders.

ASIC has introduced leverage restrictions for retail clients to protect traders from excessive risk in 2021. ASIC caps leverage at:

• 1:30 for major currency pairs
• 1:20 for non-major currency pairs, gold, and major indices
• 1:10 for commodities other than gold and minor stock indices
• 1:5 for individual equities
• 1:2 for cryptocurrencies

ASIC mandates brokers implement margin close-out rules. These rules protect traders from negative account balances by automatically closing positions if equity falls below 50% of the required margin.

ASIC sets negative balance protection, ensuring traders cannot lose more than their deposited funds. Without this rule, traders could owe money to brokers in volatile markets, which would be disastrous for retail clients.

ASIC requires brokers to segregate client funds from their operational accounts. This ensures that clients’ funds are protected in the event of a broker’s financial troubles and will not be used to cover the broker’s liabilities.

Some traders might be tempted to use offshore brokers offering higher leverage. It’s important to note that these brokers operate outside ASIC’s jurisdiction, so you won’t have legal protection or recourse if something goes wrong.

Is CFD Trading Taxed In Australia?

CFD trading is taxed in Australia. In most cases, CFD trading profits are treated as capital gains and subject to Capital Gains Tax (CGT).

• If you close CFD positions within 12 months, the total profit is taxed at your marginal tax rate without any CGT discount.
• Losses can offset capital gains from other investments, such as shares or property, to reduce taxable income.

If you’re actively trading CFDs as your primary source of income or engaged in CFD trading to make regular profits (eg day trading), then the Australian Tax Office (ATO) may classify you as a trader rather than an investor. In this case:

• Any profits from CFD trading are treated as ordinary income rather than capital gains.
• Losses can be deducted from total income, reducing overall taxable income, but this is only sometimes the case for capital losses.

CFD traders may be eligible for certain tax deductions, including:

• Costs associated with trading (brokerage fees, platform fees, etc).
• Interest on margin loans if you are using borrowed money for trading.
• Educational expenses related to improving trading skills under certain conditions.

It’s essential to maintain accurate records of all CFD trades. You’ll need to report these in your annual tax return.

The ATO provides specific sections where you can declare investment income, capital gains, and business income (for traders).

Paul Holmes

Author

An Example Trade

In this example trade, I used a CFD to trade the leading Aussie index, the ASX 200.

In my technical analysis, I used three technical indicators to illustrate their value in covering volume, volatility, momentum, trend, and potential reversal in market direction.

The MACD delivers short-term trend signals and entry and exit points. The RSI illustrates oversold and overbought conditions, momentum, and volatility. The stochastic oscillator also helps pinpoint oversold and overbought conditions and enables you to identify stop and reverse opportunities.

Suppose you combine all three and underscore your analysis with a thorough understanding of Heikin Ashi (HA) candlestick formations. In that case, you’re underpinning your decision-making, which should lead to more precise and confident decision-making.

My experience suggests indices are more likely to develop consistent trends than individual stocks or forex pairs. Macroeconomic events and domestic economic calendar events, such as inflation, government borrowing, unemployment, retail figures, etc, can often drive the direction of an index.

This fundamental approach contrasts with individual stock analysis, where you’ll get granular with the metrics of a quoted firm.

4 Hour Timeframe

To simplify the below chart analysis, dividing the market performance into three distinct periods is best:

1. Starting from the left of the chart, we can clearly see the downtrend and bearish conditions.
2. We then see the consolidation and ranging period in the mid-section.
3. After that, as evidenced on the right side of the chart, we see the bulls take charge as the price of the ASX 200 rises sharply.

Let’s apply our technical analysis to this phase and discuss my decision to go long once the signals align.

I needed all the indicators and the HA bars to align to convince me to go long. That required the MACD moving averages to cross or widen, the RSI reading above the median 50 line and rising, and the stochastic oscillator to cross or widen. The HA candles were bullish and had small shadows (wicks), but I had to wait for the final condition to be met: the MACD MAs to cross and enter the trade.

I used a CFD to take the equivalent of 10 contracts. On this CFD, entering at 8230, I needed to use 5% of my account margin. This calculation is 8230 x 10 x 5% = AUD 4,115.

I placed my stop loss at 8100, a round number close to the recent low. I closed this trade in profit at 8325 when the ASX market closed because I was mindful that the index is currently trading at record highs.

Bottom Line

CFD trading offers Australians the chance to access various financial markets, like stocks, commodities, and forex, with the ability to profit from rising and falling prices. While it provides leverage and portfolio diversity, it also carries significant risks due to market volatility.

In Australia, CFD trading is legal and regulated by ASIC, which enforces protections like leverage limits and negative balance protection. However, it’s a complex product that requires a firm grasp of the market and tax rules.

If you’re considering CFD trading, research, stay informed, and manage risks effectively.

To get started, see DayTrading.com’s pick of the top CFD trading platforms in Australia.

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