The Dangers of CFDs

[Wysiwyg]

What does this mean? Show us a chart. PLEASE

I just had to reload the platform so here they are.

 

[Trembling Hand]

And here is the Dow Futures. Identical. 100%. Tick for Tick. post any CFD index and I will give you the futures. Ftse is the LIFFE Z contract. S&P500 is the Globex ES and on and on. The cash chart is not what you are trading.

 

[Wysiwyg]

O.k. i got it.March,June September and December.Like the Australia 200 Cash isnt the XJO and the Wall Street Cash isn`t the DJIA.Thanks hand.

 

[wayneL]

O.k. i got it.March,June September and December.Like the Australia 200 Cash isnt the XJO and the Wall Street Cash isn`t the DJIA.Thanks hand.

The differences relate to cost of carry.

 

[kransky]

can someone summarise a little in slightly simpler terms as i am a little lost?

considering getting into gold via CMC so keen to hear...

surely gold on the MM follows the live gold spot price pretty closely?

actually.. how closely?

 

[Trembling Hand]

can someone summarise a little in slightly simpler terms as i am a little lost?

considering getting into gold via CMC so keen to hear...

surely gold on the MM follows the live gold spot price pretty closely?

actually.. how closely?

CMC gold instrument is linked to CBOT ZG GOLD 100 TROY OZ Futures contract. Tick For Tick.

 

[CFD]

Thanks for your input TH.

You would think the CFD Providers could save themselves a lot of complaints and bad publicity, if they made it clear what market one trades with their respective indexes.

When you buy (long) a CFD over shares the provider makes the same transaction on the share market, however an MM may carry the risk or balance the risk against other customers who have shorted the same share. With an index they have to have some way to hedge the risk and I guess the answer is the futures market.

I doubt an MM would move a price too far from the market value to take out customers stops, as they could easily lose more than they would make, from people like TH being astute enough to enter their market knowing the price would have to move back to market value.

 

[Trembling Hand]

I doubt an MM would move a price too far from the market value to take out customers stops, as they could easily lose more than they would make, from people like TH being astute enough to enter their market knowing the price would have to move back to market value.

yeah that's right if they did noticeably move from the underlying market I tell ya I would spend all my life doing arbitrage trades loading up a bucket full of their cfds and going opposite with the Futures. And not just 1 or 2 contracts I would really go nuts and I doubt I would be the only one.

What they would gain from taking out small stops they would lose 10 times over from bigger punters arbitraging them.

 

[Wysiwyg]

CMC gold instrument is linked to CBOT ZG GOLD 100 TROY OZ Futures contract. Tick For Tick.

Hi again hand, can you see above 20:46 and explain why there is a gravestone doji on CBOT ZG Gold and there is a hammer on the Spot Gold chart.Matter of fact many of the candles are different.Where is the tick for tick comparison matey.

 

[Trembling Hand]

Hi again hand, can you see above 20:46 and explain why there is a gravestone doji on CBOT ZG Gold and there is a hammer on the Spot Gold chart.Matter of fact many of the candles are different.Where is the tick for tick comparison matey.

because a Futures chart is the actual trade price. Where a CFD chart is a Bid Price. That makes a big diff matey. With ZG that could be 10 ticks or more at times.

 

[Trembling Hand]

If you still don't think so pull up a 1 min of BHP CFD and compare it to a cash BHP. Same thing not ever candle is the same because the bid chart is not the trades, but the bid for bid will be tick for tick!!

 

[peter2]

Whenever I see a "Dangers of cfds" thread I like to post an example of one of the real dangers with shorting. One of the big advantages of using cfds is the ability to sell now and buy it later (to short). The expectation is to sell high and then buy low. There have been and continue to be many opportunities to short in this market. This chart of MIS shows one of the dangers.

This typical setup to short MIS shows price moving below a support line to trigger the entry. The stop loss (SL) is placed immediately after the entry to protect the risk. The possible reward looks good as price might go back to the previous pivot low. Let me risk $400 (=2% capital) on this trade.

# MIS cfds = 400 / (4.90-4.55) = 1142.9 = SELL 1140 MIS cfds

EOD 130308. The trade is looking good with an open profit of 1140 * (4.55-4.15) = $456 (less com.)
You notice that the day's price range was huge and that price did get to where you thought it might. A buy order at 3.75 would have realised a profit of 1140 * (4.55 - 3.75) = $912. Nevermind, the trade is profitable and you move the SL to breakeven. You are pleased to have a "free" trade going.

[Consider the benefits of using price targets when shorting and include them in your trading plans.]

AM 140308. Your SL is triggered on the open as price rockets to 5.43 after news of an offer to buy MIS.
Your loss is 1140 * (4.55 - 5.43) = $1003.2 This is 2.5 times what you had originally allowed. This is the danger of using cfds.

[Consider the benefits of using GSLOs and include them in your trading plans.]

This trade lost 5% of the account balance. This is not a disaster as the trader risked a small amount of the account in this trade. If the trader had risked 10% this trade would have lost 25% of the account balance.

 

[netbank]

Hi guys,

Instead of posting a new thread, I might continue under this one..

Excuse my lack of knowledge but I have a question on position sizing models with CFDs. I don't really understand how it works with CFDs (w/ the leverage).

Say, for example, my trading capital is only $10,000, I am willing to put 1% at risk per trade which equates to $100.

So say I would like to buy ABC which is at $2.00 and I have set a stop-loss say at $1.90 (5% away from the entry). Using a fixed model, I calculate my position to be: $100 / (2-1.90) = 1000 Shares.

So, if this were a normal equity I would require a $2 X 1000 shares = $20,000 initial outlay. But for CFDs I only require 10% of that - which is $2000.

OK, so the scenario is set (lol), say later in the day my stop-loss is hit at $1.90 (5% away from my entry) and my position gets closed. From a share point of view I only would have lost $100 (1% of my capital). BUT from a CFD view, I would have loss $1,000... equiv to 10% of my trading account.

So I am guessing position sizing models don't work with CFDs (or any other leveraged instruments)?

Is any one able to correct me or explain why some people say your position sizing strategy should remain the same when using CFDs... even though as you can see from the above your losses are 10X's!!

Lol, as you can see, I am still exploring this wonderful world of CFDs.

Thanks!

 

[JimBob]

Your position sizing remains the same when using CFD's. With your example, you would still buy 1000 shares of ABC, the difference being the capital outlay you need. If your stop is activated, you should only be losing $100 whether you are trading shares or CFD's. Just because you CAN buy 10x as many using CFD's, doesnt mean you should. Your losses are only 10x as much if you brought 10,000 shares, if you buy 1000, your losses are the same.

 

[tech/a]

Your position sizing remains the same when using CFD's. With your example, you would still buy 1000 shares of ABC, the difference being the capital outlay you need. If your stop is activated, you should only be losing $100 whether you are trading shares or CFD's. Just because you CAN buy 10x as many using CFD's, doesnt mean you should. Your losses are only 10x as much if you brought 10,000 shares, if you buy 1000, your losses are the same.

Jim's spot on here and points out a misconception and perhaps a miss use of Leverage wether it be CFD or anything else.

The lower cost of entry allows positions to be taken larger than normal due to initial capital restraints while still leaving your risk profile relative to total capital your using to trade.

 

[MichaelD]

Say, for example, my trading capital is only $10,000, I am willing to put 1% at risk per trade which equates to $100.

So say I would like to buy ABC which is at $2.00 and I have set a stop-loss say at $1.90 (5% away from the entry). Using a fixed model, I calculate my position to be: $100 / (2-1.90) = 1000 Shares.

So, if this were a normal equity I would require a $2 X 1000 shares = $20,000 initial outlay. But for CFDs I only require 10% of that - which is $2000.

As more-or-less mentioned in other responses, just because you can trade large doesn't mean you should - it's a guarantee that you'll blow up your account.

If you have $10,000 in cash to trade, then trade CFDs as if you have $10,000. All it means is that most of your cash will be in your bank, not tied up in the trade.

Also, there's a second account killer in your scenario; the % of trading capital in one trade. With your example, you're suggesting committing 200% of your trading capital to the trade - another sure fire way to blow your account. A more realistic limit would be 25% per trade (ie in the scenario above, your maximum position size would be 125 shares).

 

[Wysiwyg]

I have here an example of what can happen with trading these instruments and to be prepared if looking into them.
I compared the German 30 to Wall Street Cash charts to show something that happened to me which i think was aarrrr unusual.Text on the charts explains my 2 long positions on the German 30 at 6450 ans 6448.5 with my stop losses set at 6435.Notice the sharp drop just before the uptrend.Tripped my stop loss (and other persons) then went on uptrend as i damn well anticipated and sat patiently for.Notice wall street chart shows no move at the same time.

 

[Trembling Hand]

Wysiwyg So your point is??

 

[Wysiwyg]

Wysiwyg So your point is??

My post is self explanatory and i cannot make it simpler or provide an interepreter.

 

[wayneL]

Did the futures do the same thing at the time, or was it just the CFD?