Negativity towards CFDs

[pixel]

But that to me is the point that doesn't make sense.

You have $100,000 capital. You risk 2% per trade = $2000

stop at 5 cent adverse move is 2000/0.05 = 40,000 shares held. How does do you arrive at,

If that's your problem: the discrepancy between examples - that's easily explained.
They're examples only, unrelated to each other and especially unrelated to my personal account balances.
Ignore the $2000. I calculate the position from the difference between my buy price and the stop level (which CMC let me set to a stated $ amount anyway). That's where $500 risk over 5c potential loss came to determine that I could buy 10,000 shares. That example had nothing to do with CVN (where I wouldn't dream of a 5c lower stop); neither does it give you any clue about the size of my account balance - be it with CMC or all my trading accounts put together.

I meant to explain the method. Not my personal circumstances.

 

[Trembling Hand]

If that's your problem: the discrepancy between examples - that's easily explained.
They're examples only, unrelated to each other and especially unrelated to my personal account balances.
Ignore the $2000. I calculate the position from the difference between my buy price and the stop level (which CMC let me set to a stated $ amount anyway). That's where $500 risk over 5c potential loss came to determine that I could buy 10,000 shares. That example had nothing to do with CVN (where I wouldn't dream of a 5c lower stop); neither does it give you any clue about the size of my account balance - be it with CMC or all my trading accounts put together.

I meant to explain the method. Not my personal circumstances.

Pixel I don't care about your account size. Just wondering if you say you use the extra leverage of CFDs how do you do it? To use extra leverage you have to increase position size.

If you increase position size you increase what % you are risking of your account OR reducing your stop size. Isn't that correct?

 

[pixel]

Pixel I don't care about your account size. Just wondering if you say you use the extra leverage of CFDs how do you do it? To use extra leverage you have to increase position size.

If you increase position size you increase what % you are risking of your account OR reducing your stop size. Isn't that correct?

Forget the 2% or whatever rule you want to apply to calculate the risk you're willing to take. Just assume for this demo that I am prepared to risk the loss of $500 for a trade that has either a much higher upside potential, or a very high probability of being profitable.
The $500 determines the position size. The margin determines how much of my cash I have to put up to secure the position. If I buy outright, it costs me 100% of the entry level; if I buy a CFD at 25% margin, it costs me 25%. In either case, the stop loss will limit my absolute risk at $500.

Now assume the share gains 10%. If bought outright, that's 10% profit on capital employed. Traded via the 25%-margined CFD, it's 40%.
PS: In either case, I most definitely make the judgment whether the expected return (expectancy% times target) is worth the ($500) risk before I even open the order pad.

 

[Trembling Hand]

Forget the 2% or whatever rule you want to apply to calculate the risk you're willing to take.



Now assume the share gains 10%. If bought outright, that's 10% profit on capital employed. Traded via the 25%-margined CFD, it's 40%.

With that logic you should sell a weekend trading course for $5000 a pop!

 

[zac]

I trade shares on the ASX and CFD's on the US markets.

It seems like there is a difference in how CFD's on the ASX are handled from reading this thread.
My thoughts on CFD's are that they are great as long as you respect the leverage.

Im guessing through this thread that the ASX CFD's arent like trading shares but with leverage.
Ive bought and sold heaps of CFD's on US markets and never had a problem. Spread and prices are a direct mirror of share prices.

Having a reputable broker helps too.

 

[pixel]

With that logic you should sell a weekend trading course for $5000 a pop!

I respect your right to hold a different opinion.
But I find your pigheadedness and arrogance obnoxious and offensive.
No further comment.

 

[Trembling Hand]

I respect your right to hold a different opinion.
But I find your pigheadedness and arrogance obnoxious and offensive.
No further comment.

Yeah mate thats fine. But you have shown with the above example that you don't use "extra leverage" as you original stated. All you are now claiming is an extra "return on margin". Which is an absolutely pointless stat unless you are choosing to blow sensible position sizing rules willingly or through incompetence.

Either way the leverage is often one of the main selling points of CFDs with the example like you have just given. But its BS. You shouldn't take a larger position as it just going to blow you up.

 

[pixel]

I trade shares on the ASX and CFD's on the US markets.

It seems like there is a difference in how CFD's on the ASX are handled from reading this thread.
My thoughts on CFD's are that they are great as long as you respect the leverage.

Im guessing through this thread that the ASX CFD's arent like trading shares but with leverage.
Ive bought and sold heaps of CFD's on US markets and never had a problem. Spread and prices are a direct mirror of share prices.

Having a reputable broker helps too.

+1 zac
I've heard (and in my "learning days" been the object of) some shockers by not so reputable brokers. Learned from the experience and moved on.
I don't think there are differences between countries to the extent that ASX CFDs have been reported here. Most likely, those were also the result of glitches, to be blamed on brokers rather than the location of the underlying motherstocks.
CMC let me trade Europe, US, Australia - all at very reasonable spreads. And as we seem to agree from the outset: You have to know the conditions, risks, and potential outcomes, and you need a Plan B. Adjusted paradigms and calculations.
Ignorance and lack of discipline will prove lethal far more quickly with leveraged products than straight trades.

 

[Trembling Hand]

By the way the only two selling points of CFD leverage that I can see that make sense on a risk basis are,

1. Some instruments you can still stick to your 1-2% rule and not have the total capital to cover the full position. Like index trades, FX, Commds etc.

2. To take more positions spread over different instruments while still sticking to your 1-2% rule.

 

[skc]

From my perspective, CFD's leverage allows me to have less cash sitting (or potentially idling) in the account to support the same trading activity.

Say my trading capital is $100k. With direct shares I need the full amount in my broker account, while with CFD's I only need say $25k in my CFD account to support the same position size. The remaining $75k can go sit in a online high interest savings account. Yes you pay interest on the CFD long positions and that offsets the interest income from the online savings account. But it depends on how often you have positions open (e.g. if you only day trade then there is no interest on any CFD positions). This can potentially add 4% return over the year compared to having all $100k with your CFD provider.

The other factor is counterparty risk - you'd feel quite happy (or a lot less stressed) when your CFD provider goes bankrupt and you only have $25k in there instead of $100k.

Another reason to use CFD's leverage is to allow more number of positions than otherwise. This however needs to be treaded carefully in terms of portfolio heat and correlation between positions. With pairs trading the correlation between position is pretty low so CFD's leverage is ideal.

Ive bought and sold heaps of CFD's on US markets and never had a problem. Spread and prices are a direct mirror of share prices.

Having a reputable broker helps too.

I thought CFDs are not allowed in the US. Although there Australian providers who offer CFDs over US shares.

 

[zac]

Hey T/H,
What are your thoughts on people who use CFD's but then Hedge their downside risk? ie eliminate losses to only the cost of insuring/hedging the position?

Ive just noticed some analysts mention protective puts are used against their positions.

 

[zac]

I thought CFDs are not allowed in the US. Although there Australian providers who offer CFDs over US shares.

Thats just for US residents isnt it? I know CFD's are traded heavily on the American markets otherwise, by foreigners.

The ban on CFD's there I beleive is to protect their options market.

 

[Trembling Hand]

Hey T/H,
What are your thoughts on people who use CFD's but then Hedge their downside risk? ie eliminate losses to only the cost of insuring/hedging the position?

Ive just noticed some analysts mention protective puts are used against their positions.

Not sure of the exact setup you are referring to. But it would still be cheaper to use shares and options wouldn't it?

 

[zac]

Not sure of the exact setup you are referring to. But it would still be cheaper to use shares and options wouldn't it?

Buying stock, ie buying $100,000 of BHP CFD's @ $35 each, then using protective puts at a 35 strike to hedge the downside risk.

Assuming margin is 25% you are controlling $100k using $25k with no downside risk + cost of your puts.

The only costs would be interest + cost of options.


I personally dont like the idea of using CFD's with long term investments. But im keen to hear other persons views.

 

[McLovin]

I personally dont like the idea of using CFD's with long term investments. But im keen to hear other persons views.

No franking credits. Pretty big drawback to long term holding.

 

[zac]

No franking credits. Pretty big drawback to long term holding.

LOL good point, I should have used an example of a stock that doesnt pay Dividends hehe. Such as AAPL ................ oh hang on ......

 

[Trembling Hand]

Buying stock, ie buying $100,000 of BHP CFD's @ $35 each, then using protective puts at a 35 strike to hedge the downside risk.

Assuming margin is 25% you are controlling $100k using $25k with no downside risk + cost of your puts.

The only costs would be interest + cost of options.

Its still more expensive than a straight share + oppy trade. As for the mech. of the option hedge it seems a pretty expensive hedge as well but maybe one of the oppy guys can comment.

But again my main problem with it is that peoples angle is always how little margin they need to control a huge position. Its BS. Huge position needs huge account or you are a :cowboy:

In my "pigheadedness and arrogance obnoxious and offensive" not so humble opinion

 

[banco]

Thats just for US residents isnt it? I know CFD's are traded heavily on the American markets otherwise, by foreigners.

The ban on CFD's there I beleive is to protect their options market.

Don't think it's to protect their options market. US has some surprisingly tough regulations with regards to retail traders (ie pattern day trader rule) and retail traders seem to be where the market is for cfds.

 

[Trembling Hand]

ROLL-UP! ROLL-UP!!



Why is this a selling point for anyone other than a clueless @#%&wit?

Who exactly are they selling this rubbish to? 1% margin down to 0.5%

 

[zac]

ROLL-UP! ROLL-UP!!
Why is this a selling point for anyone other than a clueless @#%&wit?

True hey.
There are some brokers that advertise 400x and even 800x.
What kinda fool plays with fire like that.