The Dangers of CFDs

[juiceman]

Although i have, and will continue to trade cfd's, i would not recommend their use to anybody.
They have, and will continue to ruin more live's than i would care to mention!
The product is ALMOST fair, and is not the problem.
Put this instrument into unskilled hands and you can have a real problem.
This post is meant for the information of those considering there use, or been lucky so far.
Yes you have or will read the books and all the information,but you won't have respected the WORDS.
Without experience the words won't mean anything, because your smarter than most RIGHT?
The first thing to learn is why stop losses don't work on any share the spikes or gap's overnight etc etc.
There a many smaller points that will bring you unstuck every time,so unless you are prepared to spend half your life infront of your computer screen, don't trade them!
If you feel you must try them, keep your bets ( iwill call them that ) very very small, and try to enjoy your learning experience.
If you are a gambler, don't even think about IT!
PS this post has nothing to do with the current state of the market, it just prompted me to warn those that are new to the game

 

[Magdoran]

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.

Hello trembling Hand,


While I salute your attempts to help newer traders become more aware of the risks of using leveraged instruments, and the complexity of derivatives in general, I would suggest being careful about making factually incorrect statements.

In particular, I would caution you to be more rigorous in developing your own understanding of derivatives when you are effectively publishing information in public forums, and avoid making sweeping comments such as “They do not directly hedge against you” referring to CFD providers not hedging CFD trades their customers make.

This in fact may or may not be true depending on the policy of the CFD provider. My understanding is that in most cases that they do hedge in the market, and different providers may buy and sell stocks, options, futures, index options and futures and a whole range of other derivative and underlying instruments in order to hedge their exposure to the market as they see fit.

Another practice they engage in is to not offer shorts on some stocks for example when they perceive a high risk to the downside (which is again skewing the “game” in their favour).

It is well known in the derivative circles on this site that I am not in favour of using CFDs as a first choice of derivative instrument. See Post 12 in "The idiots way to options riches::

I would argue that at their best, options should outperform CFDs hands down when it comes to risk to reward, but to do this, that the options environment needs to satisfy specific conditions, and where these conditions are not met, that other instruments including CFDs may be more appropriate, but not the other way around. What I’m saying is, given a general choice, options should be considered above CFDs.

I take issue with the erroneous impression that you have conveyed that the risks in using options is equivalent to the risks involved with CFDs. This is not true and is a misleading impression to convey.

While in some cases it can be true that options carry considerable risk (like selling naked options for example which leads to essentially unlimited risk positions) the maximum risk when buying options is limited to the purchase price. This is not so with CFDs, although a guaranteed stop loss can cap the risk.

It is my contention that experienced options traders can obtain the same level or better reward to a CFD position while being exposed to significantly less risk (in some cases as low as 20 times less the exposure in optimal conditions). Of course every option has unique characteristics, and volatility and the movement of the underlying are variables which will effect outcomes and need to be considered when making future projections.

However, this is only possible in acceptable circumstances as outlined in the post referred to above (please read this post which outlines the case with caveats in detail).

Yes, (unhedged) futures positions carry similar risks to CFDs although each instrument will have its unique risks and advantages and characteristics. The point is though that experienced traders assess the risk and reward of each derivative instrument and balance this against the probability of potential outcomes for the underlying.

However, I fully agree that a lot of caution is required when using any derivative, and have for years firmly suggested that newer traders paper trade a range of derivatives for at least a year before committing vital capital, or at least trade very small positions until a full understanding is developed. Further, I really think that a trader should be fully across a range of derivative instruments before allocating vital capital to trading using derivatives (especially options, futures and CFDs).


Regards


Magdoran

 

[Trembling Hand]

I take issue with the erroneous impression that you have conveyed that the risks in using options is equivalent to the risks involved with CFDs. This is not true and is a misleading impression to convey.

Completely correct, sorry I did not mean to state that. One of the great advantage options have over CFDs and Futures is the max loss being 100% if you are a buyer. I didn't mean the risks are the same with each derivative but that leverage can hit you hard when you are wrong in derivatives. Reading my post now I clearly see that was a wrong statement.

My point about not directly hedging your cfd positions is that they are on the other side of your trades and this is a zero sum game excluding commissions. They will manage their overall market exposure but the Market makers are on the other side of your trades.

 

[Uncle Festivus]

Hello trembling Hand,


While I salute your attempts to help newer traders become more aware of the risks of using leveraged instruments, and the complexity of derivatives in general, I would suggest being careful about making factually incorrect statements.........

I think you have missed your true profession Magdoran, that bit of prose would surely impress any Judge handing down a verdict .

 

[>Apocalypto<]

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.

The reason for the LOL's is mainly cuz I find the comments amusing,

NOT THE FACT TRADERS HAD NASTY LOSSES THERE IS NOTHING FUNNY ABOUT THAT.

TH,

I see what your doing and by all means hat's off to you for doing it. I think on these lines, As a trader with not even two years under my belt and never have sold or bought a share in my life, I am the demographic your aiming at. so i have excellent experience fresh in my mind to reply to this thread.

I do find it a little disturbing at the mass marketing of CFD's in all the trading magazines right now. But I opened a options account with 1200$ back in September 05, I also opened a futures account with 4000US in 06. So I disagree with you there.

the main reason I have made the comments I have is due to one fact all highly leveraged products are dangerous to the new trader.

So I personally think your one sided shot at CFD's is wrong, every man and women has to do the own due dilergence and except the responsibility of there own actions. Regardless of the slick marketing.

Now from my own exprience from trying to trade long and short on options futures and CFDs.

Unless your familure with the advanced option strategies to lower your risk like Magdoran and WayneL. I view options as very risky to just buy, to profit from rising and falling prices you have time decay to worry about and no stop losses.

CFD's offer you basic protection is a stop loss and a GSL but with the required distance you have to set them at I view them as not very useful.

There is no expiry on a CFD only roll over on the forwards. which is great as you can hold out to a degree like u can with shares. Unless your margin is reached.

You have the option to trade spot 24 hour markets and never face the risk of limit which I view as a truly scary situation to have to expirence.

One thing with CFD's which I find makes it almost imposible to win in some markets is the spreads. truly criminal but again its up to the trader to choose that market or not. I never trade markets with spreads over 5 points.

I have traded with CMC IG and Pacific Continental. I view CMC's 3% margin on some of the top 20 as a set up to beat the market player as they know markets like rio mbl can gap up and down by 4$ and smash that tiny margin but again its up to the trader to work this out.

Forex brokers are even worse then CFD providers with changing spreads hidden & costs. IG offer a set 2 pip spread on some of their crosses on my actual forex broker they had a three point spread that rose twice in the last 2 months.

So I do agree with your message in a sense I would have liked to see you raise Thread called the dangers of leveraged products for inexperienced traders.

Good trading TH,

So again I say all traders with little to very low experience in trading CFD's or any leveraged product, please I ask you to trade small parcels (CFD's) & minis (Forex, Futures) get to know and understand leverage, have strict money management and position sizing rules and follow them. Leverage is a great tool if used correctly, but i can tell you all with real life exprience LEVERAGE IS A DOUBLE EDGED SWORD

 

[binginbarrel]

I opened a CFD account with $1000 in April or something with IG Markets.
I did this in combination with the Australian Stock Report but jumped in with my own longs and shorts before I even had the chance to go over their Capital Management Model, which suggests buys and stops.

I like the Guaranteed Stop you can take with IG. With E*Trade I had $10,000 worth of MPO at 10cents back just before the last correction. Overnight they dropped through my stop and sold to give me back $8K, which turned me off Molopo. Had this not triggered I would be $20k up. That was the first and last time I`ve used a stop with ordinary shares.

Now I have gained more knowledge in the CFD area I will top up the account and run it as I run the E*Trade account. I find I need to run both together as I haven`t found anywhere to input ticker codes in the IG platform.

Has anyone ever used the ASR I mentioned above? $2,500 for a years tips.
I`ve gone and paid for a year so I hope it pays for itself.
Being a mad spec buyer I find that there is more consistency in CFD`s, or is it that I`m more used to the volatility.

Luck to all newer CFD traders.

 

[BunnyRocket]

I find it strange that most of the opinions on CFDs are negative. One of the most positive features of CFDs is the option of trading long or SHORT. To a technical trader there were enough signs of last weeks dive before it happened.
Its these times that CFDs offer great opportunities . EG Have a look at the Alumina daily chart with a 13 ema. 2 closes below the line before a huge gap downwards.
Seems to me that if you have problems dealing CFDs, then perhaps you should not be dealing shares either, the principals of survival are still the same.

 

[>Apocalypto<]

Seems to me that if you have problems dealing CFDs, then perhaps you should not be dealing shares either, the principals of survival are still the same.

Hi Bunny welcome to the ASF, I see its your first post.

Fundamentally share cfd's and stocks work from the same price that drives them to increase in value or decrease in value.

The main point here is new traders experiencing leverage trading and what the out come of that can be when that trader is over exposed to the market.

Just cuz you can trade shares well, does not mean u can trade leveraged products with the same success at the get go. In CFD's and futures example, entry and entry timing is critical and can be the difference between losing and winning. In futures and cfd's to a degree can can be right on the direction of the market but still make a loss on your trade due to your entry point.

Good trading.

 

[yonnie]

To a technical trader there were enough signs of last weeks dive before it happened.

hi bunny,

I look upon these comments with a bit of suspicion.
is it all talk in hindsight?

what were those signs you are talking about?

and you truly cannot find similar signs at other times in the last 5 months when nothing happened?

 

[Magdoran]

I find it strange that most of the opinions on CFDs are negative. One of the most positive features of CFDs is the option of trading long or SHORT. To a technical trader there were enough signs of last weeks dive before it happened.
Its these times that CFDs offer great opportunities . EG Have a look at the Alumina daily chart with a 13 ema. 2 closes below the line before a huge gap downwards.
Seems to me that if you have problems dealing CFDs, then perhaps you should not be dealing shares either, the principals of survival are still the same.

Hello BunnyRocket,


Welcome to ASF. Please read through the post I cited in the above post which goes into detail some of which is quoted below:

...

One key variable though is the capacity and actual knowledge of the individual trader/investor. If you can’t develop a sufficient understanding of options to a level to trade them, then this effectively rules this instrument out of contention. However, in my view, if you can’t figure options out, I would have serious doubt about such a person using any kind of derivative product period. I’d tend to think they’d be better off getting someone else to manage their investments such as considering using a managed fund.

This may sound harsh, but if you don’t have the intellectual capacity to understand derivatives to this level, trying to use related leveraged instruments just doesn’t add up to me – either you’ve got the ability to learn or you don’t.

...

The problem I have is that many CFD traders are not aware of their full exposure to risk, and often are not capable of evaluating the best instrument available to them based on their market view of a potential trade.

...

While I understand when I hear the response that CFDS are ostensibly simpler than options, I would argue that in the broadest perspective that this is a misconception. CFDs are actually more complex than they seem. Sure they are perhaps less complex than options, but they’re quite dangerous in the wrong hands, and certainly less flexible, and arguably can be much more exposed to risk. Sure, it’s harder to work out an options strategy at first, but if you don’t do the due diligence, you’re really leaving yourself open to potential ruin.

I would agree with you if you’d said that if you can’t trade shares, then you probably aren’t ready to trade CFDs either. Not always true though when dealing with options for example or selling short with CFDs in a sideways market, because some people can trade options for instance using clever risk to reward strategies where they would have lost money trading shares on margin.

An example of this is using an options strategy such as selling to get premium with a hedge where the time decay erodes the value of the sold position which can either be bought back later at a cheaper price locking in profit, or even allow the sold option to expire worthless allowing the seller to keep the premium. Think about it. Some people are lousy share traders but can find arbitrages very well.

If you follow Ducati’s posts he actively looks for arbitrages, and can profit very handsomely at times with low risk or even risk free trades. Just look on his blog for inspiration.

The problem that many have though is that they are pure directional traders, and face several problems that are fully outlined in the post I refer to above. So I agree with the concept of being able to trade with an appropriate style of analysis, and that without this, then the individual is tipping the odds of success against them.

The point that you are missing is that the level of exposure is vastly different using leveraged instruments, and this magnifies both wins and critically LOSSES.

Where people often fall down is not realising just how exposed they are, and with shares while the potential rewards are significantly less, so is the rate of loss as well (harder to lose 100% like you can with leverage). It is in the discipline of money management that newer traders often make critical mistakes.

Where I agree with you is that there were strong technical indicators that the current up trend was getting tired, and that some kind of pull back was highly likely from 16 July onwards – but respectfully, I would suspect that a large percentage of traders were not capable of discerning this, or did not have the discipline to apply the understanding and take sufficient action to protect their longs, or go short at the right time (of course many did take the appropriate action).

what were those signs you are talking about?

Hello yonnie, respectfully there were a range of views at the time based on technical analysis where warnings were issued. If you look at wavepicker’s comments recently for example there were Elliott Wave patterns indicating some kind of an ending diagonal was evident in the major indexes (he even posted with warnings days ahead of the event – just read through his posts – particularly on the XAO analysis thread).

Because I’ve been busy elsewhere I didn’t get much of a chance to post, but did post my S&P 500 time projection for a potential high about a month before it happened (placed as I do now in obscure threads – I do this so I don’t panic the majority because I can get it wrong):

S&P 500

The price projection was wrong, but this is common with my style, it’s easier to get the time right for me, price is another matter. Closer to the time, the actual price was evident about a week out before it came in, but didn’t hit the exact index level – but the time factor I would argue was fairly precise, and since I trade time over price, works fine for me. Hence there was a probability of some kind of pull back, and risk to longs at this time.

Read through my various posts on ASF (try the “Handbags at 20 paces” spin off thread which has lots of links to previous posts where forecasts ahead of time have been made). Especially look at my comments on the DAX (have a look at this in the “Trading the SPI Gann techniques” thread and the International index thread – specifically on the DAX for an example of where I suggest taking profits at key times when the trend may be at risk – my suggestion being to hedge or take profits at particular times).

Remember though that this is about probability, and that like Mark Douglas says “anything can happen”, and “every moment in the market is unique”. Hence knowing failure criteria is critical so you can exit when you get it wrong, which you must.

However, I think that if you knew what you were doing technically there were significant red flags that signalled a high probability of at least some kind of top coming in and some kind of marked bearish action occurring. The combination of wavepicker’s EW analysis and my cycle work for us gave a very high probability of risk to longs around the 16 July onwards. I didn’t say as much as I usually do this time, but wavepicker did (although I did publish that S&P 500 chart a month in advance).

My contention is that if you know what you are doing, then applying the risk to reward with the right instrument goes hand in hand with the analysis. Both disciplines combined with having the right trading psychology and system is critical to success. By system I’m talking about entry and exit rules, position sizing, and hedging/profit taking approaches.

Also, just because some people can’t see these signals, doesn’t mean they don’t exist. I’d argue that they do, hence this constitutes a trading edge.


Regards


Magdoran

 

[Adventure Always]

Hi Guys

CFD's are not allowed in the USA, they are seen as too risky.

With equities and options, the most you can lose is the amount you put into the transaction, whereas with CFD's you could lose more than your total account balance.

Of course to do this, you would have to have basically ignored all risk management and capital protection techniques.

Many traders apply the risk management on CFD's to the Total position size instead of the margin they are putting up, and this is a strategy which is fraught with danger.

Sensible use of proern effective strategies, can make CFD's a more efficient use of your capital than equities.

Pete

 

[>Apocalypto<]

Hi Guys

CFD's are not allowed in the USA, they are seen as too risky.

With equities and options, the most you can lose is the amount you put into the transaction, whereas with CFD's you could lose more than your total account balance.

Of course to do this, you would have to have basically ignored all risk management and capital protection techniques.

Many traders apply the risk management on CFD's to the Total position size instead of the margin they are putting up, and this is a strategy which is fraught with danger.

Sensible use of proern effective strategies, can make CFD's a more efficient use of your capital than equities.

Pete

lol,

well if your dumb enough to keep paying margin calls maybe trading is not for u!

what about with options were u have about 50 naked calls open, no risk there!

it's up to each person to work out the mechanic's of the product they trade, why is that point so hard to understand in this thread. all leveraged products are dangerous to inexperienced traders!

 

[kerosam]

hey guys,

off the topic a bit...

is it that important to have live data if i'm not a intra day trader? i think the most trades I'll do, in and out (total) is 6 times (max). Just a starter in CFDs. I don't see its necessary to pay for the live data.

thanks in advance.

 

[happytrader]

hey guys,

off the topic a bit...

is it that important to have live data if i'm not a intra day trader? i think the most trades I'll do, in and out (total) is 6 times (max). Just a starter in CFDs. I don't see its necessary to pay for the live data.

thanks in advance.

Hi Kerosam

No its not that important to have live data if you are not an intraday trader. However, the data must be current at the time of making a trading decision.

Cheers
Happytrader

 

[juiceman]

Although i have, and will continue to trade cfd's, i would not recommend their use to anybody.
They have, and will continue to ruin more live's than i would care to mention!
The product is ALMOST fair, and is not the problem.
Put this instrument into unskilled hands and you can have a real problem.
This post is meant for the information of those considering there use, or been lucky so far.
Yes you have or will read the books and all the information,but you won't have respected the WORDS.
Without experience the words won't mean anything, because your smarter than most RIGHT?
The first thing to learn is why stop losses don't work on any share the spikes or gap's overnight etc etc.
There a many smaller points that will bring you unstuck every time,so unless you are prepared to spend half your life infront of your computer screen, don't trade them!
If you feel you must try them, keep your bets ( iwill call them that ) very very small, and try to enjoy your learning experience.
If you are a gambler, don't even think about IT!
PS this post has nothing to do with the current state of the market, it just prompted me to warn those that are new to the game

Hi Kerosam
With respect the cost of live data will be the least of your problems, if the market is moving quickly against you (most operaters supply it anyway ie marketmaker )
Good luck and enjoy (look at surviving FIRST before you look to making lot's and lot's of money

 

[kerosam]

thanks fellows.

appreciate the info.

again, diverting. nothing about CFDs... i am watching the news and the media has made the indian doctor, chargeD being a terrorist, a rich man... and a hero in his homeland. sigh.

 

[CFD]

kerosam, if that's 6 trades a month, you may be interested in IG. They do not charge for their web platform and for a minimum of 4 trades a month do not charge for the live data.

 

[bailz]

I opened a CFD account with $1000 in April or something with IG Markets.
I did this in combination with the Australian Stock Report but jumped in with my own longs and shorts before I even had the chance to go over their Capital Management Model, which suggests buys and stops.

I like the Guaranteed Stop you can take with IG. With E*Trade I had $10,000 worth of MPO at 10cents back just before the last correction. Overnight they dropped through my stop and sold to give me back $8K, which turned me off Molopo. Had this not triggered I would be $20k up. That was the first and last time I`ve used a stop with ordinary shares.

Now I have gained more knowledge in the CFD area I will top up the account and run it as I run the E*Trade account. I find I need to run both together as I haven`t found anywhere to input ticker codes in the IG platform.

Has anyone ever used the ASR I mentioned above? $2,500 for a years tips.
I`ve gone and paid for a year so I hope it pays for itself.
Being a mad spec buyer I find that there is more consistency in CFD`s, or is it that I`m more used to the volatility.

Luck to all newer CFD traders.

I have started trading about 2 months ago with the same setup as you..IG & ASR..I would love to hear how you have gone so far...I started with 5K capital and so far are about even...few scary moments with my own "I think the market will go this way...because it has for the last 4 minutes.." Stop losses are so important..but your wallet will teach you faster than anyone.

Anyway I see CFDs as the financial equivalent of a loaded firearm, if you respect and understand them, they are useful....and in the wrong hands...well....

 

[hangseng]

.... I see CFDs as the financial equivalent of a loaded firearm, if you respect and understand them, they are useful....and in the wrong hands...well....

Exactly, take care and they are a useful short term trading medium. Get greedy and place position sizes past your capability (easily done) and you are in a high risk zone.

They are market makers and they will use you to take your money (they love stop losses as they know where you placed them). Just be aware that that is what they do, they are not your best mate.

Don't believe the "guarantee of market prices", that is just plain bull excretion.

If you have the knowledge and financial control they are useful. Live market trading for buying can be achieved but you won't ever get live market selling. When you get a message that you can't sell "due to current market conditions" when you place and order you will realise the limitations and high risk exposure that can apply.

I trade CFD's, but only to my advantage and not as a replacement for direct market shares. I see this as an addition to short term trading and not as investing.

Want to make real investment money, then trade open market shares or buy/sell property. CFD's will not provide the 'holy grail', unless you believe you will win lotto one day.

 

[dj_420]

Exactly, take care and they are a useful short term trading medium. Get greedy and place position sizes past your capability (easily done) and you are in a high risk zone.

They are market makers and they will use you to take your money (they love stop losses as they know where you placed them). Just be aware that that is what they do, they are not your best mate.

Don't believe the "guarantee of market prices", that is just plain bull excretion.

If you have the knowledge and financial control they are useful. Live market trading for buying can be achieved but you won't ever get live market selling. When you get a message that you can't sell "due to current market conditions" when you place and order you will realise the limitations and high risk exposure that can apply.

I trade CFD's, but only to my advantage and not as a replacement for direct market shares. I see this as an addition to short term trading and not as investing.

Want to make real investment money, then trade open market shares or buy/sell property. CFD's will not provide the 'holy grail', unless you believe you will win lotto one day.

I like them because it just gives longer trading hours, I have been playing medium short term stocks on ASX and then trading indices at night.

Not much time for sleep though. Personally I think the positions left open for several hours gives the bext exposure to trends, I have taken profits or sold with small loss way way too many times in my experiences, when if I had just left the position open and not stressed about it would have been miuch more profitable.

Only learning on CFD's though, started on CMC markets about a month or so ago.