The profitability of CFD day trading on the JSE

Abstract

Trading in the warrant, CFD (contract for difference), SSF (single stock future) and other derivative markets is popular because it provides the trader gearing to stock price movements, thus enabling trades with potentially larger returns both when prices increase and when they decrease. However, such trading is also more risky implying that the trader can lose money faster with this form of trading than with conventional trading if price movements are not anticipated correctly often enough. A trader's skill can be measured by the probability that the trader anticipates the price movements correctly. A highly skilled trader will enter enough profitable trades to make up for the occasional losses while a low skilled trader will lose more than can be made up for by the occasional profits. What are high and low skill levels in this context and how do they depend on trading costs and market features such as trends and volatilities? This paper reports the results of studies on these issues specifically for the case of CFD day trading in the large cap stocks of the JSE.