There are a couple of main types of CFDs, direct market access (DMA) and market made (MM). The most popular type is the market made variety. The main reason for the popularity of market made CFDs is simply because CFD providers offering this type of CFD are also able to offer CFDs over indices and forex pairs. DMA CFDs are generally more common with traders that are familiar with share trading for the simple reason that DMA CFDs permit traders to participate in the opening and closing phases of the market and also the order book of the underlying share over which the CFD is based. Both types of CFD have their place amongst traders and investors and it's important that you choose the type that suits your trading approach.
It's not uncommon for day traders and scalpers to utilise DMA CFDs rather than the market made kind as their orders flow directly onto the exchange and there's no market maker intervention meaning that order execution speed is often faster with no danger of being re-quoted. DMA CFDs are favoured for the reason that day traders are able to take part in and influence the opening and closing match price. The opening and closing phases of the market are usually the most liquid and of course liquidly is vital in any successful day trading plan.
Frequently day traders also have CFD trading accounts with CFD providers offering the market made variety. The reason for this is because day traders like to watch the movement of the cash indices, in addition to being able to trade them. Market made index CFDs are an affordable simple alternative to buying and selling the actual futures contract which normally calls for a higher upfront margin.
Some CFD providers offer both DMA and market made CFDs through the same platform, this is the favored solution for frequent day traders because it means that their DMA share CFD positions can be cross margined against their indice and forex CFD positions. Having both DMA and market made CFDs in one account also saves allot of paperwork as just one account must be managed, making the preparation of tax returns much easier.
Day traders often use both DMA and market made CFDs in their trading strategy, CFD providers who only offer market made CFDs refer to these traders as snipers as their plan revolves around profiting from price discrepancies between DMA and market made CFDs. Such discrepancies frequently take place during the opening and closing phases of the market as it is during these phases that there are significant price changes, some of which might not be accurately reflected in the price of the market made CFD. These pricing inaccuracies can lead to arbitrage opportunities for shrewd traders.
It is very important note that every trader has their very own trading style, some styles are better suited to DMA CFDs and others to the market made variety. Before making the choice between DMA or market made CFDs be certain to consider your trading style and ascertain whether the speed and precision of DMA CFDs or the versatility of the market made variety is better suited to you.
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If you would like to understand more about the differences between a DMA CFD and a market made CFD you must download and understand this CFD guide which will assist you in picking the right type of CFD that fits trading strategy.
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