CFD stands for contract for difference. I could go into a whole load of unnecessary detail about what that means, but here's what's important to know: A CFD is simply a derivative product based on an underlying financial instrument. Ok, maybe that wasn't so simple! Let's break that down further.

There are loads of different tradable "things" - forex currency pairs, stocks and shares, futures, gold, silver, commodities such as corn or soya...the list goes on.

A CFD allows you to trade price movements of any of those things, but without buying or selling the 'thing' itself. For example, if you thought the price of gold was going to rise, instead of buying some gold, then selling it at a profit, you could by gold CFDs. These 'contracts for difference' are linked to the real gold price, so if the price of gold goes up, so does the price of the CFD. When you sell your CFD, you get the profit!

Ah! Here's the thing...lots of underlying products have various rules, regulations, and restrictions associated with them. If you trade a CFD, which is just a contract whose price tracks the price of the real product, you don't have to take any notice of those rules!

Let's take an example - US stocks. I love these, I trade them a lot. They are easy to day trade, and you can make lots of money every day from US stocks. But, if you want to short them (profit from falling prices), there are various rules that make that more complicated than just buying and selling. CFDs don't have any such rules, so shorting them is easy.

It gets better. US law states that stock brokers cannot offer leverage of more than 4:1 on US stocks. That means to buy $10,000 worth of stock, you need at least $2,500 in your account (ie a quarter of the total cost). CFDs typically allow leverage of 20:1 or more. That leans your same $10,000 trade now only needs an account balance of $500. Many CFD brokers allow even higher leverage than this, which means you can make more profit with less money in your account.

Of course, high leverage is a double edge sword. It means you can lose more money more quickly than if you were trading with lower margin.

There's another huge advantage to trading CFDs: Most CFD online brokers do no charge commission! That can easily save you $10 each way on a trade. The broker must make some money somewhere, otherwise they wouldn't be in business, so how do they do that? They add a pip or two to the spread. In all but the tightest scalping situations, this really doesn't matter to the average trader. So in effect, everyone wins.

Well, yes, CFDs are not the hold grail for sure. The first problem is that of range. There are tens of thousands of US stocks, but only the most popular few hundred or so are offered as CFDs. If you're trading forex, futures, or commodities, that won't be a factor.

The other potential problem is nastier. Because a CFD is a derivative product created by a particular broker, that broker can set it's price as they want. They are not necessarily obliged to follow the underlying price exactly. That means that if a broker found themselves in a losing position, they could in theory move prices to gain back their position at the expense of their customers. In practice though, this just doesn't happen. CFD brokers protect their positions by hedging in the underlying market.

Of course, whatever you are trading, CFDs or otherwise, you need a system to trade! After having gone through many of them, I've finally settled on Harvey Walsh's day trading system. It's a US stock trading strategy (which I trade as CFDs, naturally!) and is very simple and easy to follow.

Using CFDs means I don't pay broker commissions, and I don't have to worry about all the rules and regulations concerning US stocks. It's the perfect system for me! You can watch some videos of Harvey's day trading system here.