Are CFDs any different to gambling?

[Flathead Flick]

Hey all. Just joined up today, so I figured I may as well get involved straight up. After many years trading shares - I started badly, but it's been easy money the last couple of years - I've recently started trading CFDs.

Don't get me wrong, I think they're great, but I can't help thinking that with all this short-term trading that I'm no different to the old guy sitting at the pokies with a ciggie hanging out of the corner of his mouth and a stale beer in his hand...

I know, all trading could be seen as gambling, but with CFDs, I dunno...anyone else feel the same?

Flathead

 

[scsl]

Hi FF, welcome to ASF!

If you're using CFDs as a means of trying to make big bucks fast, you might as well go to the casino and put it on red. But if you've got previous experience in the sharemarket and are very familiar with certain stocks, it may be worth having a go at CFDs. It doesn't stop there - with CFDs, I think the main thing you need to have is an ability to manage your risk, as you can lose much more than what you initially put up. If you have a trading plan, manage risks through stops and don't get emotional whilst trading, CFDs is far from gambling.

I only started using CFDs this year after investing/trading in traditional shares for about 3 years. Some people don't realise how fast your capital can be lost - I myself lost a considerable amount after I started. It's definately similar to gambling in that you can lose A LOT of money in a short period of time.

Don't forget that you can search the entire forum for topics you're interested in. You might not find another thread that compares CFDs to gambling like the one you have started, but if you go through some of the lengthier threads on CFDs, you'll find different opinions on them.

Btw, how are you going with your CFD trades?

Cheers,
scsl

 

[SevenFX]

The more education, experience you have, the more power and confidence you have in whatever you do...

Doesn't matter whether it's the markets using whatever instrument, flippin Properties or buying n selling cars to make a living, if your not the best at what you do, your rewards may not be the best.

Wealth transfers from the Not So Experienced to The Experienced.
Knowledge Transfers from the Experienced to the Not So Experienced.

CFD's is just another tool, just on steriods.

Cheers
SevenFX

 

[2020hindsight]

I'm still terrified by the alleged statistics that are quoted that 90 odd percent of traders lose - (and that variously quoted as 96% , 98% etc). Lets' say 97%.!!

Now.... lol - that's like playing the roullette wheel , and betting that it will land on "green" rather than "red" or "black".

And of course CFD's are simply a way to lever everything!!! - like the alternative offers:-

"run Pamploma with these other bulls and we'll pay you $5K.
but run it blindfold - and we'll pay you $100K"

Me I'm prepared to try Pamploma , but damned if I can afford to do it blindfold with my finances I've got the physical health! - just don't have the financial health. lol

Good luck to us all I say - we're gonna need it - especially you 97 over there lol. Us 3 over here are gonna make a KILLING !!

PS - I have this theory that
a) a bear sits out, and
b) a Bull is optimistic, and
c) CFD's are like a bull on viagra that's just seen a herd of heffas. - on the other side of a 10 foot high barbed wire fence -
If he clears the fence it's "Hi girls , I'm Ferdinand the BULL"
If he screws up on the runup, it's "Just call be Ferdinand "

 

[wayneL]

A note on leverage folks

Just because it's there, doesn't mean you have to use it all.

I trade futures which is the same deal leverage-wise. If you use some sort of prudent MM, it will be nearly impossible to use too much leverage, otherwise you ARE gambling

The real advantage of CFD's is the ability to short IMO.

 

[MichaelD]

When traded using a positive expectancy system, CFDs are not gambling, but leverage. Leverage increases profits but it also increases DRAWDOWN. Twice the profits means twice the drawdown for the same system.

CFDs allow sufficient leverage that you can trade a system where the maximum drawdown is guaranteed to reach 100% at some point in time - i.e. trade with maximum leverage and you will blow up your account sooner or later.

They also nip away at your capital in various other ways, but that is beside the point.

Just because they give you the opportunity to easily blow up your account shouldn't mean that you do so.

 

[swingstar]

Any investment is a gamble if you haven't done the work required to know if the probabilities are on your side. Doesn't matter what the market or instrument is.

Also, every investment has risk. Leverage will obviously multiply that risk. I don't think using leverage is the difference between gambling and not gambling though. If you are using too much leverage, and the investment doesn't pay off, then you'll obviously be in trouble.

 

[It's Snake Pliskin]

A note on leverage folks

Just because it's there, doesn't mean you have to use it all.

I trade futures which is the same deal leverage-wise. If you use some sort of prudent MM, it will be nearly impossible to use too much leverage, otherwise you ARE gambling

The real advantage of CFD's is the ability to short IMO.

I agree Wayne.

 

[It's Snake Pliskin]

When traded using a positive expectancy system, CFDs are not gambling, but leverage. Leverage increases profits but it also increases DRAWDOWN. Twice the profits means twice the drawdown for the same system.

CFDs allow sufficient leverage that you can trade a system where the maximum drawdown is guaranteed to reach 100% at some point in time - i.e. trade with maximum leverage and you will blow up your account sooner or later.

They also nip away at your capital in various other ways, but that is beside the point.

Just because they give you the opportunity to easily blow up your account shouldn't mean that you do so.

They give you the opportunity to trade OTHER PEOPLE'S MONEY. This doesn't have to be done in a martingale fashion. Nor does it have to be done without training wheels.

 

[2020hindsight]

Here's another comment from the beginner's pool.
I'll post it in small print so that you experts can skip it if you wish.

IF as they say the difference between success and failure is only a few percent,
and
IF the fees associated with CFD's are a few percent extra ,
then....
lol - I just talked myself out of CFD's

I obviously also agree with Wayne etc that youget to bet on shorts - EXCEPT that I only have a self managed super fund - so I cant do CFD's anyway.

I just have to do it with five times (or twenty etc) the invested amount - pay trivial brokerage as a percentage of that sum , and make the best of the beveraged unleveraged (and never-rich-ed?) life of the amateur

 

[rhmt01]

Has anyone tried using CFD's to write covered puts (or short collars - instead of the normal long collar)?

Also on this issue, what is the best CFD short rate around? Best I've seen is 6.25% minus 2%.

I'm thinking:

an income of $11/day in interest per $100,000 plus your net credit in time decay.

sell ATM put, short 1,000 and buy a slightly OTM call.

Oh while your at it you lodge interest rate securities as collateral for options. (and I believe one (first prudential comes to mind) or two CFD providers allow you to lodge stock as collateral these days as well)... So thats another 7 or so % fully franked on the collateral (and most interest rate securities only have a 20% haircut)... giving you more bang for your buck

any thoughts?

 

[rhmt01]

Just looking at a RIO example from todays AFR:

RIO $80.46

RIO CFD 5% - $4.03

RIO OCH margin 8% - $7.88

RIO Dec 07 $79.44 Put - $2.12

RIO Dec 07 $84.35 Call - $1.50

assumptions: collateral +7% on deposit, CFD balance +4.25%

so on 1,000

base income: $2120 - $1500 = $620

daily income on CFD: 80460*(0.0425/365) = $9.40

daily income on collateral on CFD: 4030*(.07/365) = 77c

daily income on collateral on options: (7880+1500)*(.07/365) = $1.80

so about $12 a day + $620 for the whole period ... 40 days to 21 Dec - $620 + (12*40) = $1100.

collateral required: (13410*1.25) = $16762.5 (forgot the haircut in the above - add another 64c in collateral income -> so another $25

best result - RIO $79.45 at expiry -> $1125 + $1010 (diff between CFD and written put) -> $2135

worst result - RIO greater than $84.35 -> loss of $3890 minus income $1125 = $2765 loss.

what do you think?

 

[Flathead Flick]

Hi scsl - thanks, its good to be here. Can't believe I didn't know about this earlier. Are there any other chat rooms around I don't know about???

I started out much like you - traded shares for many years before switching to CFDs this year. It was all a bit disastrous at first, mainly because I was getting some serious leverage going and was a bit lost at sea - CFDs can certainly be quite a ride at times Reminds me of when I was trading tech stocks in 2000...

But I've settled in now and simply don't trade without stops. I even move the stops with my open positions these days, for extra protection. You're right, taking the emotion out of it helps, it just took a while for me to get used to the bigger numbers and faster trading.

So all is going well now - I'm taking it pretty easy and looking after my capital. As Wayne pointed out, the key is not using all the leverage available. I also try to move on after a trade and not think about "what could have been" - which again reminds me of the tech boom/wreck, when I missed out on buying Davnet at 18c (tip from a friend/broker) only to watch them soar to to more than 20x that in a matter of months... Oh, that's right, I'm not meant to think about missed opportunities. I did say 'try not to think about..."

Anyone else moving their stops when things move in their favour?

 

[wayneL]

Can't believe I didn't know about this earlier. Are there any other chat rooms around I don't know about???

There are other chatrooms. But they are full of rampers, toss-pots and gen-u-wine clowns.

This is the only worthwhile one

 

[It's Snake Pliskin]

Has anyone tried using CFD's to write covered puts (or short collars - instead of the normal long collar)?

Also on this issue, what is the best CFD short rate around? Best I've seen is 6.25% minus 2%.

I'm thinking:

an income of $11/day in interest per $100,000 plus your net credit in time decay.

sell ATM put, short 1,000 and buy a slightly OTM call.

Oh while your at it you lodge interest rate securities as collateral for options. (and I believe one (first prudential comes to mind) or two CFD providers allow you to lodge stock as collateral these days as well)... So thats another 7 or so % fully franked on the collateral (and most interest rate securities only have a 20% haircut)... giving you more bang for your buck

any thoughts?

Does it have to be so difficult?
Really, CFD'S are something to be taken advantage of.

 

[wayneL]

Has anyone tried using CFD's to write covered puts (or short collars - instead of the normal long collar)?

Also on this issue, what is the best CFD short rate around? Best I've seen is 6.25% minus 2%.

I'm thinking:

an income of $11/day in interest per $100,000 plus your net credit in time decay.

sell ATM put, short 1,000 and buy a slightly OTM call.

Oh while your at it you lodge interest rate securities as collateral for options. (and I believe one (first prudential comes to mind) or two CFD providers allow you to lodge stock as collateral these days as well)... So thats another 7 or so % fully franked on the collateral (and most interest rate securities only have a 20% haircut)... giving you more bang for your buck

any thoughts?

If the underlying moves up you still lose and no different that a straight bear call, once cost of carry is taken into account in the options.

It's just complicating the simple.

 

[Flathead Flick]

Any investment is a gamble if you haven't done the work required to know if the probabilities are on your side. Doesn't matter what the market or instrument is.

I dunno swingstar, you still haven't convinced me that someone trading CFDs is any different to the guy down at the local TAB (let's call him Frank).

Just because you do some work to figure out if the probabilities are on your side, that doesn't necessarily mean that you're not just 'putting it on the nose'. I'm sure Frank does his research, looks at past performance, current manager, prevailing conditions and the odds before he places a bet (and this is probably more than many CFD traders do).

I can't see how that is any different to what we do - except that we cloak it in jargon.

FF

 

[It's Snake Pliskin]

I dunno swingstar, you still haven't convinced me that someone trading CFDs is any different to the guy down at the local TAB (let's call him Frank).

Just because you do some work to figure out if the probabilities are on your side, that doesn't necessarily mean that you're not just 'putting it on the nose'. I'm sure Frank does his research, looks at past performance, current manager, prevailing conditions and the odds before he places a bet (and this is probably more than many CFD traders do).

I can't see how that is any different to what we do - except that we cloak it in jargon.

FF

The key differences are the professional mindset vs the gambling mindset; money management and risk managment vs double or nothings (martingale gambling); and in trading you get at least some money back vs in gambling you DON'T.

But all participants may not operate in a truly professional way. True there are those just gambling on the direction of price. To say that going to the tab is the same, though, is quite ridiculous.

 

[Flathead Flick]

The key differences are the professional mindset vs the gambling mindset; money management and risk managment vs double or nothings (martingale gambling); and in trading you get at least some money back vs in gambling you DON'T.

But all participants may not operate in a truly professional way. True there are those just gambling on the direction of price. To say that going to the tab is the same, though, is quite ridiculous.

There you go using the jargon I'm talking about that makes us think that we're different from those at the TAB. I think you're missing the point I'm trying to make - that we convince ourselves that what we are doing is superior to gambling because it's 'finance'. You're doing just that by dismissing my comments as "ridiculous". There are plenty of ways to gamble on horses (or at the casino for that matter) to stop your losses and protect your capital. They even have their own versions of insider trading.

Besides, there are plenty of gamblers who have a professional mindset. Sure there are a lot of mugs as well, but how are the professional gamblers any different from us, or the gambling mugs different from the trading mugs?

 

[swingstar]

I dunno swingstar, you still haven't convinced me that someone trading CFDs is any different to the guy down at the local TAB (let's call him Frank).

Just because you do some work to figure out if the probabilities are on your side, that doesn't necessarily mean that you're not just 'putting it on the nose'. I'm sure Frank does his research, looks at past performance, current manager, prevailing conditions and the odds before he places a bet (and this is probably more than many CFD traders do).

I can't see how that is any different to what we do - except that we cloak it in jargon.

FF

Every investment risk is a gamble. There are never any certainties. In my opinion though, what separates the overall winners from the losers are those who can learn from their mistakes, know what the probabilities are for any single investment (can only come from knowledge and experience), and manage risk/money effectively.

I've been watching a property development show on Austar, and one couple lost $30k pounds on their first development within the space of a few weeks. They didn't do any research, rushed into the buy, didn't have any type of plan, and they paid for it. They continued to rush into things, and at the end of the series and after three developments, they were net losers down $11k pounds.

The couple they were 'competing' with ended up with a $114k pound profit. They took two (of four) high risk investments which I thought were silly (still, exposure was low), yet they learnt from their mistakes, knew a lot about building and the industry, planned each investment, and did their research.

My point: Business, investing, trading, and gambling all have their risks and winners/losers on each side, but they're all the same in essence.