Trading CFDs

[still_in_school]

Hi Guys,

thought it might be a good topic, in helping but also explaining how CFD's are traded, but also how they allow more exposure, vs a difference risk strategy, managment and control, compared to other derivative instruments out there and there advantages.

CFD's are quite similar to all these other products, such as warrants, options, margin lending, the overall advantage of CFD's are there low entry cost, almost maximun leverage (exposure), liquidity, and in a way very similar to trading stocks - as stocks (but are turbo charged on viagra and steriods)

CFD's allow you the ability to both short and long a stock, dividend capture, and stock split.

Overall, its almost like trading the stock on margin, but instead the ability to trade on as little capital of 1 - 5% (other CFD providers require a 10% down) but an exposure of 95 - 99% margin lend out.

the disadvantages are, the ability to be margin called on a 1-2% fluctuation in price action.

*** so set tight stop losses, or have money put aside in your kitty, (but if you are margin called, but still in the position, keep money in your account, to keep your position open, but also this can still magnifer your profit intentions, even further + more.

Eg.. of CFD trading, vs stocks, stocks on margin.

for example lets say the position im currently trading is SRP.


My initial entry for all instrutments is $3.75

We also have $10,000 cash as our advantage.

as for example or we can control this many amount of stocks per each $10,000 worth of value.


Stocks 2666 units x $3.75 = $10,000 Exposure

Margin (assumming 70% lend = 8800 units x $3.75 = $33,000 Exposure (30% capital, 70% margin)

CFD (95% lend) 53,333 units x $3.75 = $200,000 Exposure (5% capital, 95% margin)


as we can see from the above example CFD's allow a greater exposure of leverage and control compared to the other products in purchasing shares.

Cheers,
sis

(more on CFD's will be written shortly again.)

 

[RichKid]

Re: Trading CFD's

Great Idea to start this thread SIS, I'm currently looking at finding a CFD broker to register with so it's just in time for the next div season. Keep it going!

 

[still_in_school]

Re: Trading CFD's

Setting Stop Losses.

If we were to set a stop loss on the instrutments listed.

And if we were to set stop losses at 5% of the purchase price.

Your maximum loss would be as followed.

Purchase Price $3.75 (5% loss would equate too)

Share 5% of inital capital - $3.56 ($3.75 - $3.56 = 0.18 cents x 2666 Units = $479 Loss)
Margin 5% of full amount - $3.56 ($3.75 - $3.56 = 0.18 cents x 8800 Units = $1584 )
CFD 5% of full amount - $3.56 ($3.75 - $3.56 = 0.18 cents 53,333 Units = $9599

As a percent your initial capital would be at a loss of.

Trading Capital - Loss

Share $10,000 - $479 = $9521.00 (4.79% trading capital loss)
Margin $10,000 - $1584 = $8416.00 (15.84% trading capital loss)
CFD $10,000 - $9599 = $401.00 (95.99% trading capital loss)

so there again, with great exposure comes great loss, if the trade was to go against you.

Cheers
sis

(will write shortly, how to set a stop loss using CFD's and protecting your capital.)

 

[tech/a]

Re: Trading CFD's

If you cant trade a profit in a basic share portfolio basis then youll never trade a profit using CFD's

Those with less than enough capital to trade are generally the ones lured to leveraged instruments.Marketmakers and CFD providers desighned the product for their advantage--------although the inexperienced are convinced they are nice guys!

Now to rock your socks.

If you were SHORT ION reciently you had to fund 100% of the position you held at time of trading halt.
So if you had a $5000 positioned leveraged at 95% margin you had to find $100k.Once sorted out ie no take over or rescue you then recieved whatever the halt price a buy/sell price difference was.

Not only that but their contracts read that your money(Margin and unrealised profit) is UNSECURED and they can use it to pay other peoples debt or profit or for any purpose what so ever without your consent.If they go bust then youll be left with no come back.

Leveraged instruments are for cashed up savvy experienced investors.

The SNAKES are much longer than the LADDERS on this board game (CFD's)

 

[still_in_school]

Re: Trading CFD's

When setting a stop loss, when trading CFD's

your first question should be how much are you prepared to lose.

as a personal perference, and IMHO

i prefer to trade in exactly $1000 increments

and at an exposure of only $20,000 at time. ($1000 = 5% down, $19,000 = 95% lend)

my reason being for this is, first i have the control of $20,000 worth of stock, 2nd reason is being, if my value of $20,000 worth of stock was to go down 5% the most i could possibly lose is my inital capital of $1000.

As for this example SRP purchased in at $3.75

Stop loss would be set at $3.56

****

If we were to purchase the stock with pure cash, this would equate to the same above equation of setting your stop loss at 5%, but instead of having to only come up with $1000 and the othe $19,000 being lent, you would have to have an inital capital of $20,000 to do this trade successful.

though if you were to set your stop loss on your $1000.00 a stop loss of 5% on your $1000.00 would be used

as for this example.

the best way to work out a stop loss on your own intial investment is to caculate a 1% stop loss on the purchase price of the stock unit it self.

eg..

($1000 - 5% Own Capital : $19,000 - 95% Margin)

$20,000 / $3.75 = 5333 units purchased


$3.75 x .01% = 3 cents

stop loss, would therefore equal $3.72


$1000 (own capital, 5% stop loss on that) = $50

(5333 units x 3 cents = $50.00 Loss)


****

but please note personally if i was to trade $20,000 and $1000 was my own money, my stop loss would be, once my $1000 is eroded, as it is already 5% of the total value worth of that trade.

so before i enter this trade, because i am putting down 5%, i already know the amount im happy to lose if this trade was to go against me.

Cheers,
sis

 

[still_in_school]

Re: Trading CFD's

Another thing to mention about CFD open positions, as your profit increases, so does your equity as well,

what this means is, you can draw down on your equity, to further purchase more units in that stock, or purchase other units as different stocks, or stocks from a different sector country or even commodity.. personally i like to keep it basic.

eg..

your initial account was $1000.00

you still hold an open position, your open position, shows that you account, now has a profit of an extra $200

your account would instead be showing

Cash Position $1200 ($1000 + $200)

CFD Position current Profit value $200
Equity Margin Available $4000

what this means is, you now have a further $4000 to draw down as your equity has increased, but also has allowed to further purchase a value of units up to $4000 (5% = $200 your unrealised profits yet)

the advantage of this i find, is that this, is one way, that works very well in averaging up a postion, as a position unfolds and moves north.

personally that is one strategy i like to use, but also another strategy that also works is...

if your position was to go $200.00

and your inital investment was $1000 (controlling $20,000 worth of stock)

sell your position out, but leave your profit at risk, the reason why i say this is... let your profit run... but take your trading capital back out..

this way you have your inital trading capital back in your hands.. but your letting your profit run.. but also you can set a trail to further lock in your profit running but also be able to lock in, further profit as your trail moves up north.. till it gets stopped out..

Cheers,
sis

(will soon write about caculating return on investment/capital)

 

[tech/a]

Re: Trading CFD's

SIS

What your suggesting as tantamount to financial suicide

Here is why.

Trading leveraged instruments without knowledge of your Absolute drawdown of the method your trading means you have no idea whether the methodology your using has a chance of being profitable and if indeed its not your personal recipe for financial disaster

With 20x leverage if your absolute drawdown is as low as 5% your guaranteed poverty!
Youll need a max of 3% and I've not seen a method YET with a drawdown that low-------and I've tested 100s of systems.
Most methods collapse with less than 60% initial capital.

Don't you think that CFD providers are aware of that?

Setting a stop at a point where "This is the amount your prepared to lose"!
is simply ridiculous.Your playing "Chicken" with your hard earned.

Setting a stop where your method has proven will return you a positive expectancy is a sure fire guarentee that your stop is set correctly,and your method youve chosen to trade will be profitable.

This is what I mean about the quality of posts on this forum.

Sorry but I sincerely think this is irresponsible advice!

tech

 

[still_in_school]

Re: Trading CFD's

For this next area for caculating return on capital, ive used a online CFD caculator that i both use for caculating stop losses and for also caculating realised profits once taken from the market.

Cheers,
sis

 

[still_in_school]

Re: Trading CFD's

Hi Tech/a

thanks, for your post, but if you would please note, im not just talking about the positives of CFD trading, but also its negatives... please bear with me, as i go through each example of both losses and profits, to aware individuals about profit and losses examples.

Cheers,
sis

 

[still_in_school]

Re: Trading CFD's

As in the next example..

ive again use a CFD caculator, to aware you, of how leverage can also magnify losses, against you if your, trade was to go against you.

Cheers,
sis

 

[crashy]

Re: Trading CFD's

SIS has ommitted some major risks when trading with CFDs.

Where an investor is long a CFD and receives a dividend payment, he does not actually own the underlying stock, and as such cannot receive dividend imputation credits. Where actual dividends are not 100% franked (as opposed to CFD dividends which are never franked), the dividend amount may be reduced by an amount that reflects the taxation effect had the dividend been real. There are also tax implications to the investor when CFD dividends are received. In practice this means that a 50c dividend paid to an investor in the highest marginal tax bracket of 48.5% will have a tax liability of 24.25c per CFD.

The holder of a short CFD is required to pay the dividend. Many investors do not realise this. Where an investor is short a CFD and pays a dividend payment, the market maker will require additional payment equal to the franking credits.

Due to the high leverage involved, CFDs are suitable only for skilled investors.

It is possible to lose more money than you invest, because you are borrowing money and putting it at risk. Caution should always be taken when investing on margin. Some people get carried away and expose themselves to very large positions, sometimes resulting in financial hardship when the market moves against them. Market makers protect themselves, and to a lessor degree the investor, by triggering margin calls and sometimes liquidations. This means that if you have $1000 in your account (called the equity), and place a long trade of $10,000, if there is any fall in the share price, a margin call will be triggered. Often the market will be down for only seconds or minutes, and then go back up, in which case no action may be required. If however the stock falls and stays down, the shortfall will need to be covered immediately. If the stock falls 2%, there is a shortfall of 2% x $20,000 = $400. If this shortfall remains unpaid, the stock may be liquidated by the market maker to avoid further losses. If the equity in the account approaches zero, the stock may be liquidated. Sometimes however a stock may gap down on bad news, in which case all of the equity may be lost and more. This has happened several times in the last few years, Brambles, LLC NAB and AMP are such examples.....not to mention events like 911 and Early 2003.

As I said in another thread, it is EXCESSIVE LEVERAGE which kills traders faster than anything else.

LEPOs provide better leverage, lower costs and greater security to CFDs.

As an investment vehicle, CFDs can be very useful, especially in a rising market like we have had.

Although originally marketed as a trading tool, some savvy investors have started to question whether in fact they are more cost effective than normal share investments. Borrowing costs are lower, leverage is higher, fees and commissions are lower (no commission on an index), but best of all, equity is unlocked in real time. This means that unlike other investments, you do not need permission from the lender to borrow more money, meaning you can fast-track your wealth building. If your portfolio has made a profit of $1,000, you now can buy an additional $99,000 in the index (1% margin). Furthermore, there are no minimums for investing, if you only have $1 spare a week you can invest it, no need to pool money until you meet some silly requirement set by a fund manager.

You do not need to buy large amounts of shares in one go because there are few if any costs, you can buy one index CFD a day every day for a year if you like, and it won’t cost you any extra.

 

[still_in_school]

Re: Trading CFD's

anyway guys...

thats CFD's for you, personally I like to trade them against options, when the spreads are too wide, or there isnt enough liquidity, CFD's I've learnt and from experience from myself and some other professional traders, is best to be traded, a few days before a stock goes ex-dividend as the share price tends to move in particpation to the dividend date, stocks that channel, in a trending or ranging pattern.

but also for their ability to short or long a stock position.

Cheers,
sis

 

[still_in_school]

Re: Trading CFD's

sorry to the guys, who might be getting the wrong impression on how i explained CFD's but in the examples above, ive tried to show both positives and negatives of trading CFD.. but the actual outcomes and strategies that can be used.

Cheers,
sis

 

[tech/a]

Re: Trading CFD's

SIS.

Dont mind your explaination of the leverage both ways of CFD's but when I see

"Place your stop at an amount your prepared to loose!"

Your kidding!! Thats irresponsible!!

Sorry but thats the sort of statement a novice would make--------an unsuccessful one!

To be fair youve raised/touched on a good point on a valid way to allow your profits to run."Selling your original and rolling the profit".

But again if you have no idea if your method has a drawdown of less than 3%
trading at full leverage of 20X (Of course you can trade 2,3,5 X) your going to simply bleed to death financially.

tech

 

[phoenixrising]

Re: Trading CFD's

Great thread guys

One provider offers guaranted stop loses for 0.3%

Your comments on the implications of this welcome

I think this would take the gap,ion,etc situations out
of the equation, ie stopped out at set stop.

Cheers

PR

 

[PropertyGuRu]

Re: Trading CFD's

good tread SIS.

out of topic but crashy you still have free website selling your course? get website for US$ 8:95 per year.

 

[positivecashflow]

Re: Trading CFD's

Not too familiar with CFDs yet, but how would you hedge a CFD position?? If the stock gaps is it a guaranteed stop loss?

 

[phoenixrising]

Re: Trading CFD's

Checked out the IGmarkets site for more info on
guaranted stop loses. Very little there. May need
to phone them.

Man and CMC don't provide them.

I don't have an account yet, but interested in
trading CFD's as a stratergy

PR

 

[tridean]

Re: Trading CFD's

Hi Tech/a,

I've just stumbled across this forum and it seems as if you are in the know and was wondering if you could eloborate on the ION situation. I actually went short on this position myself and as it was my first time going short I decided to trade a quarter of what I would normally trade. Sure enough I had to fill the other 95% which mow leaves me with almost $5,000 I can not do anything about. Although it's not going to dent me too much should I lose that money could you explain in a bit more detail about the fact that it is unsecured and that someone(???) could use it to pay debts. Do you mean that if ION have debts to pay they are going to come after people like me first?

It has certainly taught me a lesson on shorting cfd's, and that I should do more homework on the fundamentals of companies. This is something that is not taught in the course I attended but it is still no excuse not to do your homework. I suppose the other thing I learnt was that I was smart in playing it a little more cautiously and only trading a quarter. For this I will give myself a pat on the back.

Having said all this I have made a handsome profit in the last 4 months and am preparing myself for when the market changes.

Hello Phoenixrising,

I was under the impression that Man and CMC do provide Guaranteed Stop Losses but at a cost. They certainly did a few months ago however I have never used them. It is something I am going to consider after the ION incident but as I use trailing stops I will have to check wether they will charge every time you set a new stop.

Tridean

 

[tech/a]

Re: Trading CFD's

Simply

The CFD provider borrows the stock and gives it to you.
When the stock de lists then the provider has an obligation to the owner of the stock to return it.
As it had a value when the provider borrowed it the stock must be returned at the price that it was originally borrowed.

Your Liability is with the CFD provider not the Owner of the stock OR ION.
your risk is limited to the value of the stock.

For the rest of the rules on how and why they can do that look at your CFD contract.Perhaps get a legal interpretation.

OH! and a guaranteed stop wont help you if you hold it at the time of trading being ceased.