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:
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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.
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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.
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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):
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
