Mcgrath learns CFDs

mcgrath111 · 18 September 2016

Hi All,

I'm quite familiar with equities and part time trade on CMC / Comsec data, however know very little about CFD's.
I've yet to sign up for the Comsec practice CFD account, wanting to have an ok understanding rather than just pressing buy/sell because I'm feeling lucky.

Can anyone provide some resources below that will help me get started in understanding the basics. I've trawled the threads however they're generally tailored to specific questions.

Question 1: Being able to leaver up to 20x, would this essentially mean If I wanted to go long I.E CBA and had 10k in my account I could buy 200k in CBA shares, however inversely could lose +200k?

Thanks for your help,

cynic · 18 September 2016

mcgrath111 said:
Hi All,

I'm quite familiar with equities and part time trade on CMC / Comsec data, however know very little about CFD's.
I've yet to sign up for the Comsec practice CFD account, wanting to have an ok understanding rather than just pressing buy/sell because I'm feeling lucky.

Can anyone provide some resources below that will help me get started in understanding the basics. I've trawled the threads however they're generally tailored to specific questions.

Question 1: Being able to leaver up to 20x, would this essentially mean If I wanted to go long I.E CBA and had 10k in my account I could buy 200k in CBA shares, however inversely could lose +200k?

Thanks for your help,

An accurate answer to your question will be difficult, as it will vary depending upon the chosen provider. Some providers offer accounts under terms that limit the traders liability, and/or offer guaranteed stop orders that a trader may utilise to similar end.

Notwithstanding the aforesaid, and presuming that the deposit requirement to open a CFD is 5%, then, allowing a little for broker and/or market spread, one can take on just under 200k nominal exposure with 10k in one's account.

However, the CFD broker/provider will be continuously marking to market any open positions, and will usually autoclose some or all positions on an account when the equity drops below a specified level. That level differs with different providers and clients/volumes, so it is best to check the details with the chosen provider. Normally a loss, exceeding the account equity, will only occur when the market moves so rapidly that the provider/broker is unable to autoclose the position/s in a timely manner.

So yes! In a disaster scenario, where the chosen security (i.e. CBA) suddenly goes into liquidation, the trader could effectively lose 20x the account balance.

And that's just for long positions! Short positions can be even scarier!

peter2 · 18 September 2016

1. You'll need a profitable trading plan.
2. You'll need to understand fixed fractional position sizing model that risks a small amount of your trading capital.
a. How much of the cfd account are you willing to risk?
b. What is the difference between your projected buy price and your stop loss?
c. 2a. divided by 2b. will tell you how many CBA-cfds you should buy.

3. You'll need the patience and persistence to follow your own rules/guidelines.

mcgrath111 · 18 September 2016

Thanks for the replies gents,

Cynic: That's ridiculous! It's beyond me that someone can leverage that much / unsure why the government wouldn't regulate such a thing more heavily (On a side note, 'if I had 10k & thought hey lets leverage this baby' & lost 200k wouldn't I declare bankruptcy and that's it? - aside from the future ramifications etc - on the inverse I could make 200k+ ...this seems like madness/ given I doubt most would leverage even up to 5x)

Peter2:
1. Trading plan - yet to be devised, my part time trading was based around short term gains of 3-6%, particularly around overselling, my last 3 trades being srf, sgh and jhc in short term bounces / so trading could be as little as once every 2-3 weeks.
Reading other trading plans, some leave out detail, while others seem to get bogged down in the math side of things. One way or the other does it essentially come down to, I will place a stop loss based on x and take profit on x?

2. Cool, I've never read into that, but google has me covered

So say I have a 100k account

I'm willing to risk 10%

Lets say my stop loss is @ 69 and my sell is @ 72...therefore difference of 3

So 10,000 / 3 = 3333?

I'm up for learning and following a trading plan; however understand that I have a long long way to go, due to the risks outline above.

Thanks,

Triathlete · 19 September 2016

mcgrath111 said:
given I doubt most would leverage even up to 5x)

,

I would think for an experienced trader that using 5x leverage would be quite common.....I did read this somewhere and they showed an example:

Start with say $25K + 125K leverage....if the experienced trader can generate a 15% - 20% return per year than their original 25K would turn into 1 mill over a 7 year period......

generating this return 15%-20% on smaller amounts seems reasonably just not sure when the pot grows whether it will be as easy to do.......

any comments from those more experienced in using CFDs

Cheers
Triathlete

minwa · 19 September 2016

Triathlete said:
I would think for an experienced trader that using 5x leverage would be quite common.....I did read this somewhere and they showed an example:

Start with say $25K + 125K leverage....if the experienced trader can generate a 15% - 20% return per year than their original 25K would turn into 1 mill over a 7 year period......

generating this return 15%-20% on smaller amounts seems reasonably just not sure when the pot grows whether it will be as easy to do.......

any comments from those more experienced in using CFDs

Cheers
Triathlete

I have no experience in CFDs but is that maths correct ?

Base amount: $150,000.00
Interest Rate: 20%
Effective Annual Rate: 20%
Calculation period: 7 years

Year Year Interest Total Interest Balance
1 $30,000.00 $30,000.00 $180,000.00
2 $36,000.00 $66,000.00 $216,000.00
3 $43,200.00 $109,200.00 $259,200.00
4 $51,840.00 $161,040.00 $311,040.00
5 $62,208.00 $223,248.00 $373,248.00
6 $74,649.60 $297,897.60 $447,897.60
7 $89,579.52 $387,477.12 $537,477.12

edman79 · 19 September 2016

mcgrath111 said:
Thanks for the replies gents,

Cynic: That's ridiculous! It's beyond me that someone can leverage that much / unsure why the government wouldn't regulate such a thing more heavily (On a side note, 'if I had 10k & thought hey lets leverage this baby' & lost 200k wouldn't I declare bankruptcy and that's it? - aside from the future ramifications etc - on the inverse I could make 200k+ ...this seems like madness/ given I doubt most would leverage even up to 5x)

There are many scenarios where leverage is useful. If you use it correctly you can diversify and REDUCE risk. Loading up on a single position is just asking or trouble. By the same token one could draw down on their mortgage and put their house on CBA. Its technically the same thing as you need to be approved for the margin to trade cfds in the first place. Consider a trading system with a 1% max draw down that makes 4-5% per year... seems like a pretty achievable goal? Apply leverage to that and you can start to see the possibilities.

tech/a · 19 September 2016

mcgrath111 said:
Hi All,

I'm quite familiar with equities and part time trade on CMC / Comsec data, however know very little about CFD's.
I've yet to sign up for the Comsec practice CFD account, wanting to have an ok understanding rather than just pressing buy/sell because I'm feeling lucky.

Can anyone provide some resources below that will help me get started in understanding the basics. I've trawled the threads however they're generally tailored to specific questions.

Question 1: Being able to leaver up to 20x, would this essentially mean If I wanted to go long I.E CBA and had 10k in my account I could buy 200k in CBA shares, however inversely could lose +200k?

Thanks for your help,

Yes you could BUT

Your using leverage on stocks incorrectly.
Very common. Many replies above don't "Get it"
Read Peters reply. He's on the money.

2. You'll need to understand fixed fractional position sizing model that risks a small amount of your trading capital.

As an example You have $10K account.
You see a trade and want to Risk 2% or $200
You see a trade where the stop is $1 away from entry so you can
buy 200 shares. Say CBA is Trading at $72 Those shares would cost
$14,400 so 1.4x what you have.

If the stop was 25c then the maths would be 4X greater and the Leverage
5.6X.
If the Risk 4% then 11.2X in this case----I'm sure you now see it.

So you can leverage the trade and STILL have an ACCEPTABLE 2% risk.

You may have 5 trades similar to this.

The trap is taking on way too much risk by basically risking other peoples Money (The leverage).

Triathlete · 19 September 2016

minwa said:
I have no experience in CFDs but is that maths correct ?

Base amount: $150,000.00
Interest Rate: 20%
Effective Annual Rate: 20%
Calculation period: 7 years

Year Year Interest Total Interest Balance
1 $30,000.00 $30,000.00 $180,000.00
2 $36,000.00 $66,000.00 $216,000.00
3 $43,200.00 $109,200.00 $259,200.00
4 $51,840.00 $161,040.00 $311,040.00
5 $62,208.00 $223,248.00 $373,248.00
6 $74,649.60 $297,897.60 $447,897.60
7 $89,579.52 $387,477.12 $537,477.12

I think the idea is after year 1 you have doubled your original 25K ..

So in the 2nd year your own stake is now 50K x the 5x leverage so that means an account size of 250K trade not 216K

After year 3 your own stake would have grown to 100K and the with leverage you are now trading a 500K account......not 259,200 and so on......basically you are doubling your original stake year on year with the 5x leverage if you can achieve the 20% return per year...

I am only new to CFDs myself and only use 10% of my total portfolio for this type of trading and no more then 3 or 4 positions at any one time.

As has also been mentioned the risk needs to be under 2% per trade otherwise I will reduce the position size..

cynic · 19 September 2016

There are some important distinctions to be made here.

One is that a stop loss order won't limit your losses to the desired level in the event of sizable market gaps, unless it is a "guaranteed stop loss order", and the minimum distance for GSLOs is typically larger than the minimum risk recommended by devotees of this style of risk mitigation.

The other is that CFD account balance needn't necessarily be the full amount of available trading capital.

If a risk averse trader deposits the full amount of trading capital into their account, whilst truly only risking a paltry few percent on a long position, then that person is deriving no benefit from leverage, whatsoever, and would be better served trading the underlying market!

Anyone thinking they can limit their risk to 2%, whilst deriving benefit from leverage, needs to read their legal documentation (product disclosure statements/client service agreements etc.) with greater attention to detail!

As has been mentioned, some just do not "get it".

tech/a · 19 September 2016

cynic said:
There are some important distinctions to be made here.

One is that a stop loss order won't limit your losses to the desired level in the event of sizable market gaps, unless it is a "guaranteed stop loss order", and the minimum distance for GSLOs is typically larger than the minimum risk recommended by devotees of this style of risk mitigation.

The other is that CFD account balance needn't necessarily be the full amount of available trading capital.

If a risk averse trader deposits the full amount of trading capital into their account, whilst truly only risking a paltry few percent on a long position, then that person is deriving no benefit from leverage, whatsoever, and would be better served trading the underlying market!

Anyone thinking they can limit their risk to 2%, whilst deriving benefit from leverage, needs to read their legal documentation (product disclosure statements/client service agreements etc.) with greater attention to detail!

As has been mentioned, some just do not "get it".

Slippage / Black Swan events---yes it happens.
The above is an example not a hard fast rule.
1% or less is often the case for larger capital bases.

Even so using the above examples limits risk far better than taking naked positions
using X times your capital base with no thought to potential exposure of your total capital base.
I know which strategy Id rather be using when either occurs.

As mentioned again some
"Just don't get it"

cynic · 19 September 2016

tech/a said:
Slippage / Black Swan events---yes it happens.
The above is an example not a hard fast rule.
1% or less is often the case for larger capital bases.

Even so using the above examples limits risk far better than taking naked positions
using X times your capital base with no thought to potential exposure of your total capital base.
I know which strategy Id rather be using when either occurs.

As mentioned again some
"Just don't get it"

Yep! Slippage, those black swans which, whilst once rare, have somehow become prolific this past decade (no prizes for guessing why) and of course those pesky weekly events when stops can do nothing whatsoever (aka weekends).

peter2 · 19 September 2016

I would like to add that the advantage of great leverage is that one doesn't need to place all the trading funds in the broker's segregated account.

eg. If your total trading capital is 100K, then depending on your risk tolerance you may only need to deposit 30%-40% to cover the margins required by your trading activities. You risk 1-2% of your 100K. The leverage provided allows you only use 5 - 10% of each position value.

You can't take advantage of the leverage unless you know how to control your risk. Education always comes first.

tech/a · 19 September 2016

peter2 said:
I would like to add that the advantage of great leverage is that one doesn't need to place all the trading funds in the broker's segregated account.

eg. If your total trading capital is 100K, then depending on your risk tolerance you may only need to deposit 30%-40% to cover the margins required by your trading activities. You risk 1-2% of your 100K. The leverage provided allows you only use 5 - 10% of each position value.

You can't take advantage of the leverage unless you know how to control your risk. Education always comes first.

Yes very good point.

cynic · 19 September 2016

cynic said:
There are some important distinctions to be made here.
....
The other is that CFD account balance needn't necessarily be the full amount of available trading capital.
...

peter2 said:
I would like to add that the advantage of great leverage is that one doesn't need to place all the trading funds in the broker's segregated account.

eg. If your total trading capital is 100K, then depending on your risk tolerance you may only need to deposit 30%-40% to cover the margins required by your trading activities. You risk 1-2% of your 100K. The leverage provided allows you only use 5 - 10% of each position value.

You can't take advantage of the leverage unless you know how to control your risk. Education always comes first.

Thanks peter, for clarifying my earlier point about one of the important distinctions.

peter2 · 19 September 2016

Sorry cynic, for repeating what you'd already mentioned. I only hope that this valuable info is finding a new home.

Edit: Maybe there's a need for some practical examples.

craft · 19 September 2016

peter2 said:
I would like to add that the advantage of great leverage is that one doesn't need to place all the trading funds in the broker's segregated account.

eg. If your total trading capital is 100K, then depending on your risk tolerance you may only need to deposit 30%-40% to cover the margins required by your trading activities. You risk 1-2% of your 100K. The leverage provided allows you only use 5 - 10% of each position value.

You can't take advantage of the leverage unless you know how to control your risk. Education always comes first.

What's the overnight financing interest rate? and on what proportion of the position is it charged? just the amount you have financed with margin or the whole position value?

Haven't looked for years but when I did, CFD's were an expensive way of leveraging. Not much use leaving your risk capital in the bank to earn rust while you pay the CFD provider expensive interest (except to mitigate the counterparty risk of using a CFD provider in the first place)

CFD for shorting individual equities maybe (not sure how good their shorting availability is) but beyond that........

cynic · 19 September 2016

peter2 said:
Sorry cynic, for repeating what you'd already mentioned. I only hope that this valuable info is finding a new home.

No apology required. You elucidated a point that definitely needed to be made.

Thanks again.

peter2 · 19 September 2016

The overnight financing rates are, as usual too high and they charge the rate on the total value of the position.

Not too high for shorter or medium term trades. Hopefully the profits will dwarf the interest charged. Let's not forget that the remainder of our capital is earning some interest from the bank as well.

ps: Good to see you back, craft. I've a handshake and hug for you.

craft · 19 September 2016

peter2 said:
The overnight financing rates are, as usual too high and they charge the rate on the total value of the position.

Not too high for shorter or medium term trades. Hopefully the profits will dwarf the interest charged. Let's not forget that the remainder of our capital is earning some interest from the bank as well.

Even if your profits do dwarf the interest charge - its poor trading business practice to pay anymore for your leverage then you have too. There are far more cost effective ways to leverage. Unless CFD companies provide something superior (shorting ability, platform, finance that you otherwise would not be credit worthy for) then I don't see the benefit of them especially considering the counterparty risk and the potential for less transparency than tradional exchange facilitated transactions.

Mcgrath learns CFDs

mcgrath111

cynic

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mcgrath111

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