# CFD Risk Management



## quinn123 (20 February 2010)

For CFD traders:

*How do you manage your risk?  *

*For my standard share trading I use:*
A fixed fractional risk management system where I don't risk more than 2% (_risk per share_) on each trade and 20% (_Total Risk_)of my total capital.  So I decide where I want to set my stop loss and my system tells me how many shares I can buy (_total shares_) according to my_ risk per share_.
(stated numbers are just an example)

How do you guys incorporate CFD margin and interest expenses into your risk management?  Do you determine the _total shares_ you can purchase from your risk appetite then use the CFD as margin to decrease your outlay for the purchase?  So you would only have to put out 5% of the cost with a 95% margin.  This leaves you with extra cash to buy other shares.
But hold on...  Arn't you trying to increase the leverage for the shares you plan to purchase and not trying to purchase other equities?  So it is defeating the point?

So

Do you assume you just have more capital in the first place?  Assume you have $15000 for your trading account and your going to be using 95% leverage on every trade.  That leaves you with a total capital with leverage of $300,000 ($15000*20).

How do you do it?  Can you send me an excel spreadsheet that you use for managing CFDs?  My email is quinnbin1@netspace.net.au

Thanks


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## satanoperca (20 February 2010)

When I trade using CFD I use fixed fractional position sizing on my capital, not how much I can leverage my capital up to.

The CFD's simply allow me take more positions however watch out for portfolio heat, one can easily get burnt due to the extra leverage.

Cheers


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## Trembling Hand (20 February 2010)

quinn123 said:


> How do you guys incorporate CFD margin and interest expenses into your risk management?




You don't. Position sizing is the same whether you use leverage or not. One of the great scams going. Margin should have no effect on the size of position taken, unless of course you wanna be a cowboy. :cowboy:

Only advantage of leverage is more trades can be taken in your account, which then exposes you to extra portfolio heat. And trades larger than your account can be taken given sensible position sizing vs reasonable stop levels. ie SPI futs value is about $125,000 but most only risk $250-$500 per trade not really necessary to have $125,000 in your trading account to take a position.


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## quinn123 (20 February 2010)

OK, so using CFD's can increase the number of positions you can enter into, which in turn increases your portfolio heat...  

So you can increase your portfolio heat with CFD's, but this would probably only be recommended up to your _Total Risk_ (maximum capital drawdown or maximum risk of the portfolio).  It would be handy if you fall short of your _Total Risk_ and want to enter more positions, although any more would be gun slinging.

You still have to include *interest *on the CFD loan in your risk management, just the same as you include *brokerage* in the _risk per share_ calculation.  That's easy though as its just another expense that reduces the _number of shares_ you are allowed to buy.  Interest has to be payed out of your portfolio's _account value_  to ensure your system is profitable (it could be done separately though as long as you keep track of interest expenses).

So at the end of the day the higher capital base you have the higher return you achieve.  

If you have a profitable system though you may as well use CFD's which will allow you to enter all of your desired trades.

Wouldn't it be a lot easier to go to the bank and ask for a loan with a set interest?  This would just increase your starting capital from the get go.

You need  to make lots of  Sadface


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## quinn123 (20 February 2010)

Also just wanted to ask; are CFD's good when the market goes bust?  Because you get credited interest on short positions and can short easily with CFD's.  

Or

Is there something in place to prevent you from shorting with CFD's in something like a global financial crises?

Thanks for the replies BTW.


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## Trembling Hand (21 February 2010)

quinn123 said:


> Also just wanted to ask; are CFD's good when the market goes bust?  Because you get credited interest on short positions and can short easily with CFD's.
> 
> Or
> 
> ...




I think that is where CFD advantage is. In being easily able to short. In fact CMC still let you short when shorting was banned on the ASX. Though I think the best things to short are futs.

Just on the diff between borrowing to add to your capital vs using CFD. The stinger for CFDs lie in the interest charge on the total value of the holdings!! So as the share increases so too does the interest charge. If you have a loan/margin you are only being charge for the margin portion. Can make a big diff if holding for a while.


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## quinn123 (21 February 2010)

Sure so CFD's are good for shorting, leverage and give you a good range of equities.  Although they have interest repayments, standard brokerage and possible dividends (dividends can be avoided obviously). 

I understand that CFD's wont affect your risk management because your system or your stop loss alternately determines your risk per trade and capital at risk.

Although using CFD's will impact on your money management because you have added costs when compared to standard share trading. 

I was thinking I could incorporate shares and CFD's under the same portfolio.  Now I see that it is probably better to have two separate portfolios; one for shares and one for CFD's.  Maybe you could always use your share portfolio first (due to lower costs) and once your funds are depleted then go to your CFD account if you want to open any more positions.  You could have just a CFD account but then you are probably going to be subject to higher costs when you don't need to be.  E.g.  If you only had a couple of active share trades that you could have forked out of your own capital.  

How do you organise your portfolios?  Separate for shares and CFD's?  or A combined portfolio?

It's just the way I set up my money management in excel to handle only share purchases which is giving me a headache.  If I wanted to add CFD's to this I would have to add all these extra costs.  Things like margin, interest, and dividends. 

Thanks.


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## quinn123 (21 February 2010)

Any good books on managing CFD portfolios?


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## skyQuake (21 February 2010)

quinn123 said:


> Any good books on managing CFD portfolios?




Exactly the same as managing a share portfolio. Just be aware that some CFD providers do dodgy things even if they are DMA. Eg you set a limit buy for 1000 shares at $10, but you probably wont get filled till the ASK is $10, even if someone hits $9.95.


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## tech/a (21 February 2010)

Most including myself use/d leverage in correctly.

Lets say you have a 20K account (your money)
You see a trade with a 25C risk on BHP which is trading at $40.
You can buy 1600 of them with a 2% risk.
But with 20K you cant take the trade.
With Leverage CFD's you can.

So you maintain a manageable risk and utilize Leverage without increasing your risk.
Your "Heat" should not alter if you don't take on trades like you now have a bank account of $400K---which most do! ( IE----CFD 20:1)


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## quinn123 (24 February 2010)

Anybody want to give there experiences with using CFD's?  

I'm reluctant to take the plunge because I think the interest costs using a 5% margin are a bit steep.  Maybe with a smaller margin it would be ok.  Anyone tested an account over a reasonable amount of time using a 5% margin?  Did interest costs eat your account alive?  My average trade duration is about a month.  I see CFD's better for daytraders.

I'm thinking about opening a cfd account simply for shorting and trying to be more eventive and find some capital somewhere else.


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## SmellyTerror (25 February 2010)

> The stinger for CFDs lie in the interest charge on the total value of the holdings!! So as the share increases so too does the interest charge. If you have a loan/margin you are only being charge for the margin portion. Can make a big diff if holding for a while.




(...and to the post above): keep in mind that for shorts you are PAID interest. If you're like me and like a good proportion of shorts to longs to balance off a plane-hits-building scenario, the interest pretty much balances out.

I do have more longs than shorts, particularly during general upswings, but about 40% of my account is in direct shareholding, and ALL of that is long (sometimes I want me some sweet franking) - so my CFD account is usually at about 50% or more short - hence *earning* interest.



> My average trade duration is about a month. I see CFD's better for daytraders.




My average hold is less than two weeks, but more relevant to interest calculations is how much of your account is generally in an open position. So there's not much difference depending on hold time, just in how much of your account is open long at any one time. For me, since about 50% is long and 50% short in open positions at any one time, my interest is roughly zero.

If you were mostly (or all) long, then it would come down to your exposure over time -  how much of the account is in open positions. If you hold one position for a year, that'll cost the same amount of interest as holding a series of 2-weekers, if you always hold a 2-weeker at any time. Then it's the brokerage / spread that counts against changes in holding time, not interest (and in that case always favours slower trading).

(In my very ignorant opinion) I think CFDs are a bit crap for day traders, since the good stuff to day-trade (futs, forex) end up with ugly-ass spreads (but I'm not the best person to talk to about the day-trading side, so take that bit with lots of salt). 

But CFDs are good for short-term share trading, becuase the brokerage is decent, the margin is great when the opportunities are there to be taken, and the ability to short is invaluable.


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## SmellyTerror (26 February 2010)

BTW (and more on topic): I agree with the folk above. More positions, not bigger positions. Stick to your sizing.

One thing to add, though, is that lots of margin means a much closer eye on risk. Learn correct position sizing, but also beware of related sectors. If you've got 2% risk on each of a half-dozen iron ore miners, you're risking 12%, not 2%, since they'll tend to move together. Worse, you're putting a lot of weight on a single big hit (eg. China, who buys nearly half the iron on earth, could have their economy tank, or have a huge natural disaster, or a revolution, or a war), and with heavy margin you could be looking at losing your house.

Sure you’d lose badly even without margin, but at least the damage will be limited. Diversification is a lot more important the more leveraged you are, IMO. If you don't want to get into direct correlation stats (which would be good - read pair trading threads around here for an idea how that works) at least try to keep fingers in a few different pies.

And, IMO, try to keep some shorts with your longs, because sometimes the whole thing falls over.


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## quinn123 (26 February 2010)

*Smelly Terror* thanks for the ideas, I will defiantly look into it.  I already do a little sector analysis for risk management but I havn't looked into pair trading or hedging my long trades with short trades etc.  Seems interesting although I'm not sure how I will apply it to my trend following system becasue I't would almost be going against the system.  There are always winners in a  bear market and losers in a bull market though.

I think I'm going to get Stator-AM now for manageing my share portfolio's.  I think I have outgrown my excel spreadsheets...  I put alot of effort into developing my money management in excel now I'm just going to give it up .  I learnt heaps doing it though.

Anyone use Stator for managing there CFD trading?


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## SmellyTerror (27 February 2010)

Oh hell no I couldn't pair trade to save my life, but the concept and a bit of the practice can let you do a quick check on whether you're as diverse as you think you are.


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