The Dangers of CFDs

[Trembling Hand]

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 necessarly 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 you posts and apprec your contributions... in XAO analysys.

Cheers
Thanks
SevenFX

yes that would be a good Idea but still the problem remains that I think most new traders use CFD positions that are way to large for there account equity. And if you have a few positions on at times like this they all go bad, result being a big draw down that's very hard to come back from.

A general rule is stop loss at no more than 2% of your total equity. If you followed that rule you should be fine. But how many do.

 

[>Apocalypto<]

Come on guys,

what about the dangers of trading futures the dangers of options the dangers of trading shares, dangers of spread betting.

the dangers of just trading,

If you do not research and understand what your trading then you are the fool and you will learn the hard way. As I did when i first started on options.

1. its up to you the trader to know what your trading and how it works.

2. its up to you the trader to know what the market is doing and how it will affect you and your postions.

3. its up to you the trader to understand money managment and position sizing.

So if you were smashed today and the last two days you have to ask youself some questions as to why that happened.

there are dangers every where and in trading I have found out most of them are self inflicted!

 

[jempol]

When doing CFD the broker need only 5% of the value of the contract right?
Worst scenario is do not meet the margin call and cut loss right?
Can we lose more than 5% originally we invested ? Do the broker automatically closed when the trade against us?
Thanks for any views

 

[SevenFX]

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

Although it may be obvious why, can you please explain why I would expose my account to overnight Gapping in the opposite direction... with NO GSL.

I rather pay the premium (insurance) for GSL, than find I free falling down the stairs....????

Ouch that would really hurt, and if I was leveraged high even worse....????

SevenFX

 

[finnsk]

yes that would be a good Idea but still the problem remains that I think most new traders use CFD positions that are way to large for there account equity. And if you have a few positions on at times like this they all go bad, result being a big draw down that's very hard to come back from.

A general rule is stop loss at no more than 2% of your total equity. If you followed that rule you should be fine. But how many do.

I think you are spot on most dont realise what financial problems you can be in "me included" if the market goes against you I learnt the hard way in May last year was setting on 10000 long ZFX will never bye that amount of shares again, I am starting to think that it is better with more smaller positions and then add if the trend goes with you if not SELL.

 

[CFD]

Money Management.

Capital Risk per Trade - 2% (excluding costs)
Bank say - $10,000-
Guaranteed Stop Loss - 5%

eg
Share entry price - $10-
Stop Loss Distance - $0.50 (5%)
Trade - Risk ($10,000- x 2%) $200- / GSL Distance $0.50 = 400 shares
- Purchase 400 x $10- = $4000
Outlay - Margin say, 5% = $200-
- GSL fee say 0.3% = $12-
- Buy Commission say 0.1% = $40-
- Sell " = $40- + or -

 

[porkpie324]

Fair comment the 2 above post's. I never over extend margin wise that is I do not like to margin more than free equity, last night was the largest mark down that I have had in just over a year trading CFD's. I alway's research the companies I trade, as I mentioned before I did make up some of that loss.
As for GSL's I think the cost is more than 0.3% on share cfd's, but I will enquire about that. porkpie

 

[kerosam]

anyone been shorting for the past few days? i'm sure u r making a killing in the market. Monday might be a good time to short again. my picks are MBL & RIO. no reason.

 

[whitta27]

I think cfds are actually illegal in US - i'm reading a book on cfds and this is what it said. dyo research tho..

cheers

 

[Magdoran]

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.

Hello caleb2003,


No, you will probably not hear gloating from the true professionals. Because anyone who achieves real success in the market usually has probably had their own rite of passage “baptism of fire” of their own. Me, I did some seriously risky things and learned the hard way too – there is nothing like a significant loss as a wake up call. The market is a ruthless teacher.

I salute your honesty and your ability to take responsibility for your actions. These are the hallmarks of a person who is capable of becoming a very effective player in the market. The fact you can be open and relatively objective about this is commendable, and actually a very positive attribute, more than you probably realise right now.

The question is, can you recover, and learn from your mistake, and come back to fight another day? The long term winners are those that can dust themselves off, pick them selves up and get back up again…

What have you learned? Can you objectively assess why this happened? Can you perceive how important risk and reward analysis is? Can you incorporate better methods for the future? Can you find ways to improve your discipline? Are you prepared to really research and learn about derivatives in depth now?

I would suggest picking up Mark Douglas’ “Trading in the Zone” and perhaps “The Disciplined Trader”, because you have probably suffered far worse damage to your trading psychology than to your bank account, than you realise. If this goes “untreated”, you may find that your future performance will suffer unless you confront your psychology and can be sure that you can regain a level of market objectivity.

Read the Douglas book cover to cover, even if it starts to seem repetitive. If this doesn’t help you through this, and it isn’t of benefit, then you will be an exception…

Also, since you were using leveraged instruments please read through the derivative area and consider the range of discussion on this subject – maybe this seems a bit like closing the gate after the horse has bolted, but if you are determined to continue, you really must devote time to improving your understanding of derivatives. To just trade CFDs without having really worked out the mechanics of a range of derivatives is in my view a serious omission, which Is not obvious until the market delivers a “body blow” when events like this unfold.

Believe me, I’ve been where you are, and I can tell you, this is the hardest game in town. It is all roses until a significant adverse event happens that you haven’t prepared for…

You have my sympathies, best of luck.


Regards


Magdoran

 

[caleb2003]

Hello caleb2003,


No, you will probably not hear gloating from the true professionals. Because anyone who achieves real success in the market usually has probably had their own rite of passage “baptism of fire” of their own. Me, I did some seriously risky things and learned the hard way too – there is nothing like a significant loss as a wake up call. The market is a ruthless teacher.

I salute your honesty and your ability to take responsibility for your actions. These are the hallmarks of a person who is capable of becoming a very effective player in the market. The fact you can be open and relatively objective about this is commendable, and actually a very positive attribute, more than you probably realise right now.

The question is, can you recover, and learn from your mistake, and come back to fight another day? The long term winners are those that can dust themselves off, pick them selves up and get back up again…

What have you learned? Can you objectively assess why this happened? Can you perceive how important risk and reward analysis is? Can you incorporate better methods for the future? Can you find ways to improve your discipline? Are you prepared to really research and learn about derivatives in depth now?

I would suggest picking up Mark Douglas’ “Trading in the Zone” and perhaps “The Disciplined Trader”, because you have probably suffered far worse damage to your trading psychology than to your bank account, than you realise. If this goes “untreated”, you may find that your future performance will suffer unless you confront your psychology and can be sure that you can regain a level of market objectivity.

Read the Douglas book cover to cover, even if it starts to seem repetitive. If this doesn’t help you through this, and it isn’t of benefit, then you will be an exception…

Also, since you were using leveraged instruments please read through the derivative area and consider the range of discussion on this subject – maybe this seems a bit like closing the gate after the horse has bolted, but if you are determined to continue, you really must devote time to improving your understanding of derivatives. To just trade CFDs without having really worked out the mechanics of a range of derivatives is in my view a serious omission, which Is not obvious until the market delivers a “body blow” when events like this unfold.

Believe me, I’ve been where you are, and I can tell you, this is the hardest game in town. It is all roses until a significant adverse event happens that you haven’t prepared for…

You have my sympathies, best of luck.


Regards


Magdoran

Thanks for your comments, I'm not out of the game and realise that if I was to give up at this juncture then it would truly be a waste of time, I'm quite happy to learn the mistakes early on and would have been very annoyed if I had been successful for a year and then lost everything, as it stands I've lost a fairly small portion of my overall equity as I wasnt foolish enough to put to much money in the accounts.

I feel a bit lonely that I'm the only one that will admit failings today when there must surely be 100s or thousands in the same boat but nobodys talking?!?

As far as my own discipline goes I will read the books mentioned, currently reading Van tharp and completed the trading game of his which quite obviously points out the flaws I had. But that was the point I made, I am fairly well read on this matter but still managed to make the mistakes!

One major thing I've done is to not concentrate enough and allow family distractions (young kids!)to get in the way at trading time, its simply too important and should require my absolute concentration at the time of trading and that was a big failing.

The main thing I'm rueing is that I saw this correction coming and fully intended to short the market at the time, I would have done very well but perhaps would have just continued the same cycles and eventually come unstuck anyway.

Cheers for the comments, very helpful

 

[Awesomandy]

I feel a bit lonely that I'm the only one that will admit failings today when there must surely be 100s or thousands in the same boat but nobodys talking?!?

By coincidence (or not), it seems that truely successful traders are not very common either, and they may also feel quite lonely sometimes (apart from having some kind of a fan base).

 

[R0n1n]

hey Caleb,

don't worry I saw it coming too and although I sold off all my big positions but kept some small ones like LLC and CTX. I had taken some small positions in them. The good thing is I had only put 20% of my funds instead of 100%.
The bad thing is I still kept these on.

 

[CFD]

Was that a bad thing though? You didn't know what was going to happen, you established a view of what might happen and reduced your risk accordingly.
Sounds good to me. (You can always look back and say if only I'd closed out this or if I'd sold short, but it's what you did do and what you learned from the experience that counts.)

 

[yonnie]

Come on guys,

what about the dangers of trading futures the dangers of options the dangers of trading shares, dangers of spread betting.

the dangers of just trading,

If you do not research and understand what your trading then you are the fool and you will learn the hard way. As I did when i first started on options.

1. its up to you the trader to know what your trading and how it works.

2. its up to you the trader to know what the market is doing and how it will affect you and your postions.

3. its up to you the trader to understand money managment and position sizing.

So if you were smashed today and the last two days you have to ask youself some questions as to why that happened.

there are dangers every where and in trading I have found out most of them are self inflicted!

what a harsh way to put it this way.

no matter how much you research and understand, once you start trading you`ll make more mistakes than you have fingers and toes.

I`m sure you have been there yourself and even now you probably make mistakes and I think it`s excellent of caring people like trembling hand to point out the dangers of leverage in cfd`s, so people can learn.
how else can they learn if trade_it doesnt say anything and leave it to others?

 

[jonojpsg]

Thanks for your comments, I'm not out of the game and realise that if I was to give up at this juncture then it would truly be a waste of time, I'm quite happy to learn the mistakes early on and would have been very annoyed if I had been successful for a year and then lost everything, as it stands I've lost a fairly small portion of my overall equity as I wasnt foolish enough to put to much money in the accounts.

I feel a bit lonely that I'm the only one that will admit failings today when there must surely be 100s or thousands in the same boat but nobodys talking?!?

As far as my own discipline goes I will read the books mentioned, currently reading Van tharp and completed the trading game of his which quite obviously points out the flaws I had. But that was the point I made, I am fairly well read on this matter but still managed to make the mistakes!

One major thing I've done is to not concentrate enough and allow family distractions (young kids!)to get in the way at trading time, its simply too important and should require my absolute concentration at the time of trading and that was a big failing.

The main thing I'm rueing is that I saw this correction coming and fully intended to short the market at the time, I would have done very well but perhaps would have just continued the same cycles and eventually come unstuck anyway.

Cheers for the comments, very helpful

Hey Caleb2003, Good to hear the general gist of this thread is one of taking this game seriously! I just happened to decide on Thursday to use my CFD account with IG for the first time! Put in $500 to start with. Not sure why given the state of the market, but I bought in to BHP at 3754 - probably thought they were near bottom and would rebound. Only 250 CFDs as I wanted to start small and I thought this would be OK. Set a stop loss at 3700 which I thought was OK when they closed at 3730.

Unfortunately when they opened Friday am at 3590, little did I realise that I would get stopped out there rather than at my 3700 because I didnt use GSL!!! So instead of losing around $135 I lost $410. A good lesson, which I followed up by having another crack during Friday when I watched closely. Bought 250 BHP again, this time at 3602, set stop at 3552. Watched while they muddled upwards and gradually increased my stop to 3615. Missed the next couple of hours action though when they hit 3650 and then faded, otherwise would have lifted to 3640 probably. Obviously would have stopped out when they sank in the last hour but above my purchase so didn't lose.

Good way to practice. Do you use Comsec? Their professional trader platform helps when watching market moves.

Anyway, I am looking forward to trying to use CFDs more professionally, eg as hedges against my equities trades. Also looking forward to more discussions here!

 

[R0n1n]

Was that a bad thing though? You didn't know what was going to happen, you established a view of what might happen and reduced your risk accordingly.
Sounds good to me. (You can always look back and say if only I'd closed out this or if I'd sold short, but it's what you did do and what you learned from the experience that counts.)

CFD, you are right. What I really learned is:

Never rely on gut feeling.
Stick to rules, if the indicator says sell .. bloddy hell sell..lol

Above all, what saved me was Money Managment. As I had devided my funds into lots and had only taken small positions with 20% in a few stocks. The balance of 60% was yet to be put in(the last 20% is only put in if it really runs). I had already sold my bigger positions.

 

[>Apocalypto<]

what a harsh way to put it this way.

no matter how much you research and understand, once you start trading you`ll make more mistakes than you have fingers and toes.

I`m sure you have been there yourself and even now you probably make mistakes and I think it`s excellent of caring people like trembling hand to point out the dangers of leverage in cfd`s, so people can learn.
how else can they learn if trade_it doesnt say anything and leave it to others?

LOL,

what a laugh, hey lets get something straight, when i blew over 50% of my capital on CFD's, I did not blame anything, I said what the hell r u doing and I worked my ass off to understand why it went wrong and how to fix it.

So hate to say, its not harsh its reality. if you were over exposed and you got caught learn from it!

Like it or not this is not a game, its a damn business, make sure understand that business and are prepared to the best of your abilities when u start. in every business understand risk! DO YOUR HOMEWORK! Hey why dont you ask Trembeling Hand about the dangers of futures, how lovely it is to be caught in limit for a week. now thats a blast.

yonnie,

you and the others can powder coat things all you want but if any member tells me they blame the product they are trading for there loss, I will tell them they are a damn fool and to wake up. If you and other members could not see the tips and advice in my post read it again and again, till u get it cuz help and tips are there, If you chose to see it.

that's my

 

[barney]

Thanks for your comments, I'm not out of the game and realise that if I was to give up at this juncture then it would truly be a waste of time, I'm quite happy to learn the mistakes early on and would have been very annoyed if I had been successful for a year and then lost everything, as it stands I've lost a fairly small portion of my overall equity as I wasnt foolish enough to put to much money in the accounts.

I feel a bit lonely that I'm the only one that will admit failings today when there must surely be 100s or thousands in the same boat but nobodys talking?!?

As far as my own discipline goes I will read the books mentioned, currently reading Van tharp and completed the trading game of his which quite obviously points out the flaws I had. But that was the point I made, I am fairly well read on this matter but still managed to make the mistakes!

One major thing I've done is to not concentrate enough and allow family distractions (young kids!)to get in the way at trading time, its simply too important and should require my absolute concentration at the time of trading and that was a big failing.

The main thing I'm rueing is that I saw this correction coming and fully intended to short the market at the time, I would have done very well but perhaps would have just continued the same cycles and eventually come unstuck anyway.

Cheers for the comments, very helpful

Howdy Caleb,

Don't worry about being the only one to get nailed a bit over the past week .... There is no doubt plenty of "us" ............. I've learned a lot since joining ASF, and part of what I've learned to date saved me from being smashed last week (although I'm still suffering a bit .............. I've still got a few open positions which I have to "manage" this week, so its been a nervous weekend ................ I'm actually angry and dissappointed in myself, because I "dropped my guard" ............... I knew this was coming, but relaxed just at the wrong time, because things were going well lately. Even when it started to unfold, instead of cutting the losses early, I decided to "get cute" and try and "predict" the market .............. Bad move!!

My point is, we all have to stay vigilant .......... no room for complacency in trading ............... trust our judgement and stick by our rules we have formulated PRIOR to the proverbial hitting the fan, because when the crunch comes and the "pressure" is on, as humans, we are prone to making wrong decisions (at least I am anyway) Good luck.


Hi Magdoran,

Good to see you still bouncing in and out with great advice as in your post above ............. "Trading in the Zone" will probably have a lot more meaning to many after last week !! ............ I've been in this position so many times I've lost count now ................. but I'm still here to fight another day thanks to good advice from yourself and others ........ All the best, Barney.

 

[Trembling Hand]

LOL,

what a laugh, hey lets get something straight, when i blew over 50% of my capital on CFD's, I did not blame anything, I said what the hell r u doing and I worked my ass off to understand why it went wrong and how to fix it.

So hate to say, its not harsh its reality. if you were over exposed and you got caught learn from it!

Like it or not this is not a game, its a damn business, make sure understand that business and are prepared to the best of your abilities when u start. in every business understand risk! DO YOUR HOMEWORK! Hey why dont you ask Trembeling Hand about the dangers of futures, how lovely it is to be caught in limit for a week. now thats a blast.

Hey Trade_It you’re doing a lot of LOL the last couple of days.

If you read the very first post it says " 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." Not to mention to large a position.

As far as other types of derivatives the same problems exist but I am yet to see someone opening up a futures account with $1000. I think most CFD traders are retail/newbies attracted to the leverage of CFDs without factoring in the true risk. That’s all this post was meant to be about. Nothing more just a heads up, to be careful as to the large hit you can take with leverage.
I think the attraction to CFDs and the way they are pushed to retails traders not yet learned as to account blowups is a big tell as to how profitable the Market Makers game is. Most Futures brokers push Money/Risk management as they make money from you surviving, where as CFD providers make money from you losing but do not tell that to there customers. They do not directly hedge against you they carry the risk. They make money on risk just like an insurer. Betting against newbies put the risk in their favor anything that can change that like telling people to be careful and use money management wisely cannot be a bad thing.