CFD Resources
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Good article Stink, but where my dilemma lies is in the different advantages/disadvantages of CFD's against Options trading.
I've read up a little on both (notably Nick Radge's Adaptive Analysis which is the best trading book I've read so far) on CFD's, and a colleague lent me some old Optionetics CD's he got from a seminar in the States.
Both approaches are very attractive, promoting strong risk management philosophies, and the Optionetics stuff has the disadvantage of being totally US-centric, but I'd still appreciate one of the more experienced guys/gals here putting a comparison in plain language for me.
I've read up a little on both (notably Nick Radge's Adaptive Analysis which is the best trading book I've read so far) on CFD's, and a colleague lent me some old Optionetics CD's he got from a seminar in the States.
Both approaches are very attractive, promoting strong risk management philosophies, and the Optionetics stuff has the disadvantage of being totally US-centric, but I'd still appreciate one of the more experienced guys/gals here putting a comparison in plain language for me.
Yeah i know what you mean!
I am just trying to learn about the other tools that are available, i have been told to not even bother with options as they are to complicated?
I dont know i will probably just stick with trading stocks and see how that goes.
I am just trying to learn about the other tools that are available, i have been told to not even bother with options as they are to complicated?
I dont know i will probably just stick with trading stocks and see how that goes.
Yes, the options stuff I've read/heard about does seem real complicated, but the amount of risk mitigation involved appeals to me, mainly with the spread strategies I've learned about. That combined with my possibly sadistic urge to master the art of Bearish trades make options look very appealing. There's something incredibly cool about making money when many of the "Wise" are blowing it, yes I know that's a bit simplistic but you get my drift.
I haven't scratched the surface yet, and would really appreciate some opinions from experienced CFD & options traders
Is volume an issue on options in Australia - one of the big triggers for options trading in the US/UK seems to be high volume (i asume signifying high volatility + higher chance of having a trade filled). Does this mean the ASX isn't the best place to trade options and to stick to looking at the UK/US markets.
I haven't scratched the surface yet, and would really appreciate some opinions from experienced CFD & options traders
Is volume an issue on options in Australia - one of the big triggers for options trading in the US/UK seems to be high volume (i asume signifying high volatility + higher chance of having a trade filled). Does this mean the ASX isn't the best place to trade options and to stick to looking at the UK/US markets.
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Options are to CFDs as chess is to checkers. 
CFDs are simply leveraged instruments. Only the underlying affects the price. You should be able to find all the info you need from prospective CFD providers.
Options have a number of factors affecting the price (including the underlying), called greeks. It's possible to trade options without indepth knowledge of greeks depending on the strategy, but it's in your best interests to be well-informed. Best bet is to just get a book. I have Natemberg but I am getting through other books first, so I can't recommend it just yet (although it's been recommended by Mag and other prominent options traders on these forums).
Edit: Options also expire, whereas with CFDs you can hold for as long as you want.
CFDs are simply leveraged instruments. Only the underlying affects the price. You should be able to find all the info you need from prospective CFD providers.
Options have a number of factors affecting the price (including the underlying), called greeks. It's possible to trade options without indepth knowledge of greeks depending on the strategy, but it's in your best interests to be well-informed. Best bet is to just get a book. I have Natemberg but I am getting through other books first, so I can't recommend it just yet (although it's been recommended by Mag and other prominent options traders on these forums).
Edit: Options also expire, whereas with CFDs you can hold for as long as you want.
Thanks Swingstar,
Yeah i will take your advice on getting a book or two, Catherine Davey apparantly has a couple of books on cfd's that have good reviews.
What i am trying to get my head around is how you protect yourself in a cfd trade should the trade go against you.
e.g lets say i have 10k total cap.
I find a cfd that i am happy to trade.
How do i work out what the amount of leverage i can use is if i want to make sure that i have the money available should i get margin called?
I hope that makes sense, just not sure on whats been covered for what? If i am using 1k of my 10k to open a position then how much can i use leverage whilst still remaining secure?
Hope someone can set me straight here!
Cheers Stink
Yeah i will take your advice on getting a book or two, Catherine Davey apparantly has a couple of books on cfd's that have good reviews.
What i am trying to get my head around is how you protect yourself in a cfd trade should the trade go against you.
e.g lets say i have 10k total cap.
I find a cfd that i am happy to trade.
How do i work out what the amount of leverage i can use is if i want to make sure that i have the money available should i get margin called?
I hope that makes sense, just not sure on whats been covered for what? If i am using 1k of my 10k to open a position then how much can i use leverage whilst still remaining secure?
Hope someone can set me straight here!
Cheers Stink
Stink with leveraged instruments money management should be a key priority.
i.e i never risk more than 1% of my total bank on any single trade.
So if your capital was say $10,000.
then i wouldnt be risking more than $100 on any given trade. (Some people dont mind 2% but i have a larger bank size so im happy with 1%).
So $100 is the max you can lose.
Now lets say you trade the aussie200 on CMC as an example.
My stops are usually 10 points away (although some trades are 20 points) but lets stick with 10 points for simplicity.
So if the A200 is @ 5000 and your buying it your stop will be @ 4990. In saying that you would trade 10 contracts (each contract with cmc = $1 so 10 contracts = $10 per point move) so 10 point loss = $100
understand?
i never risk more than that no matter which trade. That ensures you will always preserve your capital in bad times.
So lets say you have 2 losing trades? thats 20 points. $200 down
but then your 3rd trade you catch onto a nice run of 30 points.
Thats $300 up but your left with $100 profit even thow your win/loss ratio is 33.3%
So you see the cliche` is true about cap your losses and let your winners run.
Obviously you would know that with winning trades you would incorporate trailing stops to lock in profits as it goes whilst leaving a small buffer for the price to move.
i.e i never risk more than 1% of my total bank on any single trade.
So if your capital was say $10,000.
then i wouldnt be risking more than $100 on any given trade. (Some people dont mind 2% but i have a larger bank size so im happy with 1%).
So $100 is the max you can lose.
Now lets say you trade the aussie200 on CMC as an example.
My stops are usually 10 points away (although some trades are 20 points) but lets stick with 10 points for simplicity.
So if the A200 is @ 5000 and your buying it your stop will be @ 4990. In saying that you would trade 10 contracts (each contract with cmc = $1 so 10 contracts = $10 per point move) so 10 point loss = $100
understand?
i never risk more than that no matter which trade. That ensures you will always preserve your capital in bad times.
So lets say you have 2 losing trades? thats 20 points. $200 down
but then your 3rd trade you catch onto a nice run of 30 points.
Thats $300 up but your left with $100 profit even thow your win/loss ratio is 33.3%
So you see the cliche` is true about cap your losses and let your winners run.
Obviously you would know that with winning trades you would incorporate trailing stops to lock in profits as it goes whilst leaving a small buffer for the price to move.
Ageo said:
Thanks Ageo,
Yeah pretty sure i know what you mean.
If i buy a certain amount of contracts on a particular stock and the price goes up or down by 1c = 1 point which in this example equates to - or + 10$??
What i am still unsure of is how the margin side of things work with cfd's, or how do you trade with margin without increasing the risk to your capitol? Or is this impossible?
Cheers Stink
stink said:What i am still unsure of is how the margin side of things work with cfd's, or how do you trade with margin without increasing the risk to your capitol? Or is this impossible?
Cheers Stink
Margin is basically money you need to have there availabe to trade. But trust me if your not risking more than 1-2% per trade you will never have an issue with margins. And what i mean by risk, it simply means thats the most you will lose so before you enter any trade you should know the maximum loss your prepared to take if the trade goes against you.
lol not sure where i am now!
Firstly i would not be intraday as i still have to work a real job, but could i not set rules to be carried out should the price do this or that?
"Money i need to have there available to trade" i still dont understand what you mean by this? If i have 10k and trading margin what am i trading with? my own 10k or margin $? how much of each etc etc
Could you actually give me a practical example of how you would calculate and use margin given a capitol base of 10k. The amount are not important, i just want to see how you work it out, or another way of looking at it is. If i have 10k how much margin can i trade with without running the risk of losing all my 10k or worse oweing more money than i have?
Thanks again, please dont be frustrated but when numbers are involved i need it explained in lamens mate
Stink
Firstly i would not be intraday as i still have to work a real job, but could i not set rules to be carried out should the price do this or that?
"Money i need to have there available to trade" i still dont understand what you mean by this? If i have 10k and trading margin what am i trading with? my own 10k or margin $? how much of each etc etc
Could you actually give me a practical example of how you would calculate and use margin given a capitol base of 10k. The amount are not important, i just want to see how you work it out, or another way of looking at it is. If i have 10k how much margin can i trade with without running the risk of losing all my 10k or worse oweing more money than i have?
Thanks again, please dont be frustrated but when numbers are involved i need it explained in lamens mate
Stink
stink said:lol not sure where i am now!
Firstly i would not be intraday as i still have to work a real job, but could i not set rules to be carried out should the price do this or that?
"Money i need to have there available to trade" i still dont understand what you mean by this? If i have 10k and trading margin what am i trading with? my own 10k or margin $? how much of each etc etc
Could you actually give me a practical example of how you would calculate and use margin given a capitol base of 10k. The amount are not important, i just want to see how you work it out, or another way of looking at it is. If i have 10k how much margin can i trade with without running the risk of losing all my 10k or worse oweing more money than i have?
Thanks again, please dont be frustrated but when numbers are involved i need it explained in lamens mate
Stink
Ok Stink
Lets say you wanna trade RMD for example.
Margin requirements are 5% so lets say we buy 4000 @ $5.30.
Now $5.30 x 4000 share cfd's = $21.200 worth of stock, but we only need to put up 5% of this (because we are geared up 95%) so we put up out of our own money $1006 to hold this position.
now lets say our stop is @ $5.20 (10cents away), that would mean if it were hit our max loss would be 10c (10c x 4000 = $400 loss).
Lets say it moves to $5.40 instead, that would mean we would have made (on paper) 10c so that would = a $400 profit.
With trading CFD's dont worry about margin too much but more about risk. If you have a stop in place to never risk more than 1-2% per trade (on your overall capital) then margins wont ever bother you.
help a little?
P.S just a little side note, if you decide on holding positions overnight than GSL's (Gauranteed Stop Losses) are recommended because of the price gaps on next day opens. But if you intra day trade then its ok.
Ageo said:
Yeah this is helping mate,
So wheres the main risk then?
1. Being geared up to much?
2. Having to many positions open?
Going of your example, couldnt you hypothetically have that one position open with stops etc all in place and leave the reaminging $8994 in the trading account? Surely then you would not be margin called, what the worst that can happen in this situation the price gaps down dramatically overnight, but if you have GSL then your ok right?
Cant be that easy or everyone would do it
But thanks heaps mate you helping me understand this stuff and thats the main thing.
Regards Stink
stink said:
Well basically main risk is not having any stops or having your stops too wide thus your capital would deplete much faster if you say had 10 positions on.
If you traded the A200 only for example then 1 position only with a max risk of 1% would be fine. Reason being is that you could afford to lose 100 times before going bankrupt.
So as you see there is no need to worry about over exposure as your prepared to take losses and can do for upto 100 times.
But remember also your losses will always be capped to 1% per trade. But your winning trades are never capped. Capped downside but unlimited upside potential.
Perhaps Tech/a can shed some more light towards this.
stink said:
Stink its not so much of having more positions opened ill explain why.
Lets say person 1 has 2 positions open but is risking 10% per trade. If he losses both, that means 20% of his capital is gone).
Person 2 risk's 1% per trade, and has 10 positions and all 10 went bad (more than likely you will have a few winners but lets say the worst case). 1% x 10 trades = 10% of capital lost, so even thow person 2 had 8 extra positions open and lost them all, he still has 10% extra than person 1.
Ageo said:
I see what your saying and i think this is where the differenec comes in from trading normal stocks. Wouldnt the stop be to close if only risking 1% per trade on a 10k cap base? Or because with CFd's you are only after small moves in price does it not matter?
Regards Stink
stink said:
Well depends on how volatile the stock is. i.e gold normally likes to counter trend in the early hours of the morning before moving back to it current trend its formed. So wider stops are necessary and when doing wider stops it simply means enough to risk 1%.
Basically you can place your stops and adjust your contract sizes to whatever you like but it is preferred to have smaller contract sizes and and a wider stop in some cases as it gives more room to move.
But with say the A200 i have tight stops (10 points or so) as im looking for breakouts. Thats something you will develop over time (a system).
