# What is your opinion of CFDs?



## Steve C (29 November 2012)

Hi All,

I have spent much time learning about the market but at the present time have very limited capital to use in the market. I originally planned to trade stocks and just take little gains here and there and practise. The scary and exciting prospect of "leverage" has got my attention. If I used a broker such as IG markets and traded using very tight money management (stop losses, position sizing etc) it seems to be a great way to make greater potential profits (of course greater losses but using very tight stop losses this can be prevented?) 

What is your opinion on CFD's?
Can you provide me with any tips before I venture into CFD's?

Thanks,

Steve


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> Hi All,
> 
> I have spent much time learning about the market but at the present time have very limited capital to use in the market. I originally planned to trade stocks and just take little gains here and there and practise. The scary and exciting prospect of "leverage" has got my attention. If I used a broker such as IG markets and traded using very tight money management (stop losses, position sizing etc) it seems to be a great way to make greater potential profits (of course greater losses but using very tight stop losses this can be prevented?)
> 
> ...




i've traded a lot of cfd's, they have one thing in common, their cost is extremely high.....

let's say youre looking at a 100 lot on the xjo, the spread is $1/ contract during normal trade hours (plus/minus either side of 10 min auction) then the spread might go $4/ contract overnights ..... youre at 4439/40, you open to buy at 40's, on execution youre in the red for $100 (that's 40 to buy (long) and 39's to sell (close))

this means for every trade just cost you $100 regardless if its a round trip or scaled trade.....so your pos needs to move to 4440/41 just to get flat.....

if you hold the cfd overnight the cost of carry needs consideration regardless if youre long or short and if youre short you may have to pay dividend costs.......

the other considerations: the charts are not bourse fed, i am not sure they can reflect the time component correctly and clearly cannot have reliable indicators because of those two reasons

you cannot get depth (real depth of market, not the bogus one supplied by the desk)

you cannot know volume

the advantages are........erm....oh, yes, there is one.....you can use much smaller sizes compared to say an ES contract relative to the cfd.....a futures contract might move $50 per tick so that might give you an idea of relative value/cost to a cfd.....unfortunately this actually magnifies the risk cost and by that i mean the spread that needs to be covered for the cfd regardless of size actually expands as you use less contracts compared to a single futures contract at lesser brokerage....i'll have to re-research that one to get the math, but, i'm pretty sure that's correct......on the plus side it can serve to assist in education in a live set-up so you arent subject to a $50/ tick cost when wrong......


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFD's?*

one more

my fave

slippage !!

those At-Limit orders (euphemistically referred to as Stop Orders) ....haha.....oh the joys of slippage......not

get to trading with them and "gauging" the risk as best you can especially in news event periods

...that's a major hurdle for a lot of players


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## Trembling Hand (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> The scary and exciting prospect of "leverage" has got my attention. If I used a broker such as IG markets and traded using very tight money management (stop losses, position sizing etc) it seems to be a great way to make greater potential profits (of course greater losses but using very tight stop losses this can be prevented?)




Steve you still seem to have no idea about how to use leverage AND money management.


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> The scary and exciting prospect of "leverage" has got my attention.




if you can dial down the margin/financing and dial to the play youre running that is going to go a long way toward safety and away from danger.......running at 95-99% margin is another killer......

remember this golden idea: 







> when youre right you get some of the points, when youre wrong you get ALL the points!


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> (of course greater losses but using very tight stop losses this can be prevented?)




this is a misnomer that many get caught on....i've watched it happen to several players....not talking about simple slippage here.....

no one can guarantee your (limit order) stop unless you get one by contacting the cfd provider and it'll probably cost you X amount of points, effectively widening your spread going into the trade

if the real instrument gaps down heavily you'll gap down with it and get executed at an extreme price to where you thought you would exit or even worse way beyond your margin setting 

i was trading the may mini crash and caught without being able to exit so even tho i was well in the black the move against me was way too strong and at that time it took well into 2 mins to get an execution and that was from an offer to execute a price that was well away from current active price......


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## Steve C (29 November 2012)

*Re: What is your opinion on CFD's?*



Trembling Hand said:


> Steve you still seem to have no idea about how to use leverage AND money management.




How do you mean trembling hand? 

Thanks for all the replies.


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## Trembling Hand (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> How do you mean trembling hand?
> 
> Thanks for all the replies.




Give us a worked example of how you would position size your trades.


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## Steve C (29 November 2012)

*Re: What is your opinion on CFD's?*



Trembling Hand said:


> Give us a worked example of how you would position size your trades.




When I refer to position sizing I mean it in the simplest way possible.

If i have $5k capital to trade, use $500 or $1000 a trade and minimal margins in order to avoid wiping out my whole account with one trainwreck trade... have I got things completely mixed up here?


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## Trembling Hand (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> When I refer to position sizing I mean it in the simplest way possible.
> 
> If i have $5k capital to trade, use $500 or $1000 a trade and minimal margins in order to avoid wiping out my whole account with one trainwreck trade... have I got things completely mixed up here?




Like I said in your other thread. In spite of spending months "learning" about trading you seemed to of missed the very first step and probably most important. You have no idea about position sizing. You just want to "trade".


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> When I refer to position sizing I mean it in the simplest way possible.
> 
> If i have $5k capital to trade, use $500 or $1000 a trade and minimal margins in order to avoid wiping out my whole account with one trainwreck trade... have I got things completely mixed up here?




these amounts of 







> $500 or $1000 a trade



 are arbitrary and the margin itself is a seperate calc (undefined)

i think youre best to find a simple pos sizing calc

the main point of money management is to help you withstand the drawdowns for the avail capital and you should expect the dd's to be considerable versus the gains.....there's a truck load of pos sizing posts on asf...just type in "position" into the advanced search 

here's a couple more...mostly for stocks.....

thebull.com.au/experts/a/5676-how-do-i-select-the-size-of-each-trade.html

learncfds.com/Position-Sizing-Secrets-Of-The-Grand-Master.html 


lulz at title of the last one.....

make that simulator run hot


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## Steve C (29 November 2012)

*Re: What is your opinion on CFD's?*



Trembling Hand said:


> Like I said in your other thread. In spite of spending months "learning" about trading you seemed to of missed the very first step and probably most important. You have no idea about position sizing. You just want to "trade".




Definition of 'Position Sizing'
The dollar value being invested into a particular security by an investor. An investor's account size and risk tolerance should be taken into account when determining appropriate position sizing. 

Read more: http://www.investopedia.com/terms/p/positionsizing.asp#ixzz2Dalt6Ql2

Edit: Thanks Joules for taking the time to post that.


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## Trembling Hand (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> Edit: Thanks Joules for taking the time to explain that instead of making blanket illusive statements.




Mate I cannot force feed you. If I say you need to look at what position sizing is I mean really friggin look at what it is and how exactly you will implement it. Not look up a 20 word paragraph on investopidia after 2 threads and 3 weeks! I asked you to give a worked example so we could illustrate it and you couldn't be bothered to or clearly had no idea from lack of effort in your research. My answers may be illusive but its your money on the line and you are just being silly or lazy. Hardly the approach to extract detailed responses when your own effort is sub-standard. Good luck with that approach and trading.


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## CanOz (29 November 2012)

*Re: What is your opinion on CFDs?*

Steve, if you're trading equities then fixed fractional position sizing is the best method IMO. There is a thread on this too, no time to link at the moment...

CanOz


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFDs?*



CanOz said:


> Steve, if you're trading equities then fixed fractional position sizing is the best method IMO. There is a thread on this too, no time to link at the moment...
> 
> CanOz




Canoz, the man who likes to trade2win 

stator-afm.com/fixed-fractional-position-sizing/


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## Joules MM1 (29 November 2012)

*Re: What is your opinion on CFDs?*

TH is right 

i'm not helping as much as i wanted to

there's stuff about a trader that is about saying versus doing.....less than thorough qualitative character produces less than stellar quantitative results......or worse


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## skc (29 November 2012)

*Re: What is your opinion on CFDs?*



Steve C said:


> Hi All,
> 
> I have spent much time learning about the market but at the present time have very limited capital to use in the market. I originally planned to trade stocks and just take little gains here and there and practise. The scary and exciting prospect of "leverage" has got my attention. If I used a broker such as IG markets and traded using very tight money management (stop losses, position sizing etc) it seems to be a great way to make greater potential profits (of course greater losses but using very tight stop losses this can be prevented?)
> 
> ...




CFDs is a decent instrument for various reasons and I traded them for a number of years. But it is not a solution to low capital. In fact, it is the perfect instrument to blow up under-capitalised accounts.

CFD providers target beginners because they are unlikely to have the skill or discipline to handle the leverage. It's like giving a baby a samurai sword... chances are the baby will get hurt first.

On tighter stop loss... in addition to the "gap" risk mentioned already, you should hopefully understand that the stop isn't something you can just make as tight as you want. By tightening the stop, you will get stopped out more frequently and your expectancy will suffer.


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## Steve C (29 November 2012)

*Re: What is your opinion on CFD's?*



Trembling Hand said:


> Mate I cannot force feed you. If I say you need to look at what position sizing is I mean really friggin look at what it is and how exactly you will implement it. Not look up a 20 word paragraph on investopidia after 2 threads and 3 weeks! I asked you to give a worked example so we could illustrate it and you couldn't be bothered to or clearly had no idea from lack of effort in your research. My answers may be illusive but its your money on the line and you are just being silly or lazy. Hardly the approach to extract detailed responses when your own effort is sub-standard. Good luck with that approach and trading.




Fair enough Trembling Hand, you are right I obviously need to research more as I don't have the required understanding to give you a worked example. 

Thanks for the other replies... clearly work to be done, I don't think I should be playing with leverage with my level of knowledge that has clearly been exposed as limited at best.

Steve


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## IFocus (29 November 2012)

*Re: What is your opinion on CFD's?*



Steve C said:


> Fair enough Trembling Hand, you are right I obviously need to research more as I don't have the required understanding to give you a worked example.
> 
> Thanks for the other replies... clearly work to be done, I don't think I should be playing with leverage with my level of knowledge that has clearly been exposed as limited at best.
> 
> Steve




Steve before putting money on the line you have to sim if you want to succeed.

Make profits siming you might make profits for real without leverage.

Failure to do this will consign you most likely to the 95% of punters that fail 

 Good luck


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## So_Cynical (29 November 2012)

My honest opinion of CFD's is that they are a great tool for CFD providers to make money, the attraction for the punters is the leverage and thus massive potential profits..but for most that potential will only ever be just that...potential, while the providers rake in the cash.


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## nulla nulla (30 November 2012)

So_Cynical said:


> My honest opinion of CFD's is that they are a great tool for CFD providers to make money....... the providers rake in the cash.




+1  I looked at a few and came away with the impression that you would basically be dealing with a book maker who would betting against you. Worse, if it went your way you could be stopped out for a variety of reasons to limit their exposure to losses.


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## AlterEgo (30 November 2012)

nulla nulla said:


> +1  I looked at a few and came away with the impression that you would basically be dealing with a book maker who would betting against you. Worse, if it went your way you could be stopped out for a variety of reasons to limit their exposure to losses.




Only true for Market Maker CFD's, not DMA CFD's.


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## captain black (30 November 2012)

I'd also encourage anyone who has an account with a CFD provider in Australia to look closely at how the bankruptcy of MF Global and the return of client funds has played out. It has taken a year for 78% of funds to be returned to clients in Australia. Technically there is no money missing from client segregated accounts in Australia, it's simply that current client protection laws are woefully inadequate. 

I'll be writing a more detailed post on this soon but in the meantime it's worthwhile reading through the court judgements in relation to MF Global, your money is not protected in the way you may think it is.


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## Trembling Hand (30 November 2012)

So_Cynical said:


> My honest opinion of CFD's is that they are a great tool for CFD providers to make money, the attraction for the punters is the leverage and thus massive potential profits..but for most that potential will only ever be just that...potential, while the providers rake in the cash.






nulla nulla said:


> +1  I looked at a few and came away with the impression that you would basically be dealing with a book maker who would betting against you. Worse, if it went your way you could be stopped out for a variety of reasons to limit their exposure to losses.




Thats because you don't understand how to use leverage, like most CFD users, and you don't know how the price is derived from the underling instrument. there is nothing sinister or bad about them its the application that people use that is the problem but thats no diff to any thing in the market.


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## nulla nulla (30 November 2012)

Trembling Hand said:


> Thats because you don't understand how to use leverage......




I have a very good grasp of leverage thanks TH. I have used it every day since January 2009 to varios levels. i am more than aware of the increased risks associated with being "over leveraged' and leveraging CFD's, imo, are a recipe for disaster particularly for novice traders.  Each to his own though and I am not trolling for an argument. I just expressed an opinion.


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## Trembling Hand (30 November 2012)

nulla nulla said:


> I have a very good grasp of leverage thanks TH. I have used it every day since January 2009 to varios levels. i am more than aware of the increased risks associated with being "over leveraged' and leveraging CFD's, imo, are a recipe for disaster particularly for novice traders.  Each to his own though and I am not trolling for an argument. I just expressed an opinion.




Being "over leveraged" is not how you use CFDs or any type of leveraged instrument. Therefore the leverage is of no danger if using it correctly. Very simple.


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## nulla nulla (30 November 2012)

Trembling Hand said:


> Being "over leveraged" is not how you use CFDs or any type of leveraged instrument. Therefore the leverage is of no danger if using it correctly. Very simple.




So simple in fact that only 95% of traders fail. Of course not all of them traded cfd's or were over leveraged. But then we digress. 

The original poster invited all and sundry to give their opinions and we have both done just that.


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## So_Cynical (30 November 2012)

nulla nulla said:


> +1  I looked at a few and came away with the impression that you would basically be dealing with a book maker who would betting against you. Worse, if it went your way you could be stopped out for a variety of reasons to limit their exposure to losses.




Yep they are financial services bookies...just no other way to genuinely think about MM CFD's



Trembling Hand said:


> Thats because you don't understand how to use leverage, like most CFD users, and you don't know how the price is derived from the underling instrument. there is nothing sinister or bad about them its the application that people use that is the problem but that's no diff to any thing in the market.




I didn't say they were evil or sinister and im well aware what leverage is and how to use it..MM CFD's are for punters, short term 1 or 2 spins of the wheel punters..fine if that's what your after.


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