The Dangers of CFDs

[Trembling Hand]

Out of a morbid sense of curiosity and genuine concern for traders trying to make money out of leveraged derivatives. How have peoples CFD accounts gone through this mess. I have always suspected that most CFD traders use dodgy value at risk calculations. Like having a large amount of longs thinking if they get stopped out they will lose X amount but don’t factor in the possibility of getting hit on every holding at the same time. On days like the last three and especially today some traders who are holding longs worth 50%of their account could see the account whipped out. No wonder the CFD Market Makers love them.

 

[R0n1n]

When I saw what XAO was doing yesterday(the double top) I pretty much closed all my long positions.

The good thing is that from this mess will emerge new runners.

 

[Awesomandy]

I'm not sure if we will hear from those who have severely lost out. They probably can't access asf, now that they probably don't own their computers to access their internet on anymore.

 

[Trembling Hand]

I'm not sure if we will hear from those who have severely lost out. They probably can't access asf, now that they probably don't own their computers to access their internet on anymore.

LOL. I was wondering that too.

 

[caleb2003]

I'll give an honest perspective of my account(s) as I think there are lots of lurkers who are too proud to admit these things and as far as I'm conerned making mistakes is good for learning properly (in a perverse way)

I have 2 cfd accounts one I trade share CFDs and the other Index.

The share acount has taken a pummeling mainly because I had Rio as a long but I closed almost every other position yesterday but kept Rio open (bit of a mistake again!), this acccount has lost around 20% value but is bordering on margin call territory so unless RIO picks up this afternoon then I'll close that out but still be in the game.

THe other account is where I've made the biggest booboo by letting an spi long trade become an investment from around 10 days ago (which I dont think will see its price near for months now) and the worst one was that I had a long on dax the other day and for some bizzare reason did not put a stop loss even though I had pledged to myself in the last week to only daytrade the markets due to the subprime issues, only to see it suddenly down thousands, I then made the classic mistake of hoping that the good old US would help it back up but of course that didnt happen, now this account is in dire straights and at risk of being kaput, even better as I saw it break down I had enough equity to put a short on the ftse which kept me balanced but because I put a stop loss on that and it was met then that didnt help at all!!

My options on that are a: put more money in and hope the market rallies soon and doesnt turn into the biggest crash since 87.

b: Close out the positions and lose all the equity completely.


As I write this I must point out that I have fully read and studied these situations prior to embarking trading but still managed to make the mistakes on more than one occasion.

Go on, all the experienced traders can now have a good gloat at what I think will be a very common theme, but at least from my point of view I now have some good old fashioned sense smacked into my head.

 

[Trembling Hand]

Go on, all the experienced traders can now have a good gloat at what I think will be a very common theme, but at least from my point of view I now have some good old fashioned sense smacked into my head.

Thanks for your post. You will not get any gloating form me. In my 7 years of trading early on I have blown many an account. The main theme of each blow up has been denial of a trend change while being highly leveraged. That's what the CFD issuers are looking for. I know that is deadly now and trade with derivatives in a completely different way.

 

[Vicked]

Forgive my ignorance, what exactly is a CFD?

 

[Awesomandy]

My options on that are a: put more money in and hope the market rallies soon and doesnt turn into the biggest crash since 87.

b: Close out the positions and lose all the equity completely.

How about taking a straddle strategy? Given that we are in a period of very high volatility, the chance of everything staying in a small range and consolidate is quite low. As long as it moves quite a bit higher or lower, you should make a little bit back.

 

[R0n1n]

Forgive my ignorance, what exactly is a CFD?

here you go Vicked. Hope this helps.
---------------------------------------------------

What is a CFD?
CFD stands for Contract for Difference. A CFD is a type of derivative: the price of a CFD is derived from the value of some other asset. Often with CFDs it is based on the price of a share, but it can relate to effectively any financial instrument.
Rather than trade or exchange the asset itself, a CFD is a deal whereby two
parties agree to exchange money according to the change in value of the
underlying asset between the point at which the deal is opened and when it is
closed. One party will be a buyer (of the value of the asset), and one will be a seller. The buyer will make money (from the seller) if the asset value increases and will lose money (to the seller) if it decreases. Conversely, the seller will lose money as the price of the asset rises and make money as it falls.
Put simply, therefore, CFDs are a means to gain exposure to the change in value of a financial instrument without actually being in possession of that instrument.
When dealing CFDs with IG Markets, we act as a CFD provider, meaning that
when you choose to place a deal, we will take the other side of the transaction.
You choose whether you are a buying or selling, and this defines us as being
either the seller or the buyer in the contract.
The ins and outs of how this work will become clearer if we look at an example of using a CFD to trade a share.

Example: buying Oxiana
When trading shares using CFDs, the procedure and terminology are all very
similar to normal share dealing (and in many cases are exactly the same, in fact).
It is April and Oxiana is trading on the Australian Stock
Exchange at $2.81/2.82. Being bullish about the prospects
of the mining sector in general, you feel that the stock is
undervalued and that a recent sell-off in Oxiana has been
overdone.
You decide to buy 10,000 shares as a CFD. This
means that rather than physically taking ownership of the
shares, you are instead opening a contract with the provider that gives
you the same financial exposure as if you had gone out and
actually purchased the same number of shares.
The price that is quoted for shares is always the same as the
price that is trading on the stock exchange(for DMA). You therefore
open your deal at $2.82, the offer price of the shares.
Just as with a regular share transaction, a commission is charged.
IG markets standard commission for Australian shares is 0.1%.
This means that your opening commission is: 0.1/100 x 10,000
shares x $2.82 = $28.20

Margin
A fundamental difference between trading a CFD and physically buying and selling shares in the conventional
manner is that when trading a CFD you only need deposit a small portion of the value of the stock that you are
commanding initially. This is known as margin.

The amount of margin required varies according to the liquidity and volatility of
the underlying instrument. For Australian shares the margin requirements range
from 5% to 50% of the underlying value, depending on which share you are
dealing.
Only having to put down a fraction of the value of the stock that you are
commanding obviously makes trading easier and more convenient. It means
that you do not have to tie up as much of your funds with a trade as would
normally be the case.
Should the share price move adversely, however, you need to be able to send
further ongoing margin.
Oxiana is margined at 10%.
You are dealing in 10,000 shares at a price of $2.82. This means
that the underlying values of the shares in which you are
dealing is 10,000 x $2.82 = $28,200.
The margin of 10% is therefore just $2820.

 

[Judd]

"Might just drop in here the distinction between investment and punting. You all know it but you may not know this. Over many years of stockbroking, the attrition rate of clients punting (rather than hedging) in futures, forex and CFDs is very high. Vastly higher than equities and vastly higher than equity portfolio investors.

Clients constantly have to put up more money. Dealers constantly have to replenish their client base. They are great products for the tiny, tiny minority that consistently get it right and for the brokers taking commissions on high turnover hopefuls, but there is little science and a lot of luck for Joe Blow.

That stake money will disappear as surely as your TAB credit balance. It's the truth."

For what it is worth, a view from Marcus Padley in The Age of 21 July 2007.

 

[krisbarry]

Yes some people will wake up after this latest nightmare to discover they are in serious debt. I continually see all these flashy brochures about CFD trading and getting continued phone call from CFD companies to sign me up. I say no thankyou!

Only trade with what you can afford to lose. I borrow money from a bank and stick within my credit limit. I know if I lose all that money I can afford to easily pay it back, but when you trade at 10 times the risk, then that is just foolish.

 

[zuluwarrior08]

My CFD account, whilst very small (read up a bit about it in begginers lounge-alternative trading strategies) would have taken an absolute walloping today, I would have been in severe margin call...BUT...closed all Long positions 3 days ago ive only kept 2 trades open, a short on ANZ that i erntered on tues and a short on MBL.

That said, I think ive learnt a huge lesson, many lessons in fact, and caleb2003, Ill try and take out the same lesson as you today- this market truly has smacked some sense into my head too.
Thanks to all for your input and opinions

:

 

[whitta27]

i had $5100 in my cfd account on monday..
by yesterday it had risen to $6300 on the back of some big gains from CIG, SDL and a few other smaller quicker trades.
I sold a few positions on open this morning..
and my account stands at $5500..
so considering the weeks events i've come out allright with cash to open long possies with today depending what happens this arvo.

what do people anticipate to happen next week?

cheers whitta

 

[Awesomandy]

That said, I think ive learnt a huge lesson, many lessons in fact, and caleb2003, Ill try and take out the same lesson as you today- this market truly has smacked some sense into my head too.
Thanks to all for your input and opinions

:

Absolutely. For those who have survived and are still around after this week, this is a very good learning experience.

 

[zzodr]

Hi, I'm fairly new here...

Im lucky I closed my MBL position about a week ago after it gapped down and hit my stop, I must say I was tempted to adjust my stop-loss down but this is a big no no! I told myself to stick to my trading plan.
I lost $1000, but if I had of held on for this morning, when MBL gapped down around $5 on the open
I would have got smashed!!

I have a long CSL position open that is doing ok considering the carnage this morning... a new drug being approved was welcome news today.

CFDs are enticing, the leverage is a tempting Mistress... but you have to have discipline.. use stop-losses and stick to them.

Preservation of your trading capital is THE MOST important thing.
Happy trading!

 

[zzodr]

Having said that,

February and the China jitters did me more damage than the sub-prime mortgage stuff going on now... so I'm guess I could say I'm getting better at managing risk. Can't retire yet though!

 

[jempol]

CFD vs Option which one better in term of leverage?

I can't find any broker in US market run CFD...They trade option.
CFD only familiar in Australia? Forgive my ignorance..I never try CFD usually i trade option in US.

 

[SevenFX]

New to CFD's with IGMArkets and reasonably pleased with their platform, but their service is Generally Exceptional, esp compared to Commsec's robotic scripted operators I deal with.

Anyway If I may ask Trembling Hand.

Would it be fair to say using a standard stop loss during the day would suffice most if not all [Indexes (trading SPI)] but not necessarily shares as they can gap up/down on news.

Wheres holding overnight one would very very wise, to use a (GSL)Guaranteed Stop Loss, on either Indexes or Shares.

Been reading your posts and appreciate your contributions... in XAO analysys.

Cheers
Thanks
SevenFX

 

[CFD]

I think cfd's originated in the UK before spreading through Europe and then Oz.

 

[porkpie324]

Dangers yes, but after last nights us market drop there was a more than good chance the aus mkt would be oversold this morning, and it was.
So some great trading oppotunities came up, IGO o/sold down to a low of $5.45 (opened pos at 5.55, 5.58 closed 5.86, 5.92). SMY sold down to $3.55 (opened pos at 3.58,3.60, 3.65, closed all at 3.80) MCR still holding.
OK my a/c still down on last nights close but clawing my way back.
BTW I don't trade with stops and going by todays action it's obvious why.
As for loosing money I can say that I've never made so much in such a short time as with CFD trading. porkpie