Trading Contracts For Difference (CFDs)

Here is an interesting article from The Australian which highlights the risks associated with Contracts For Difference (CFDs). Sorry if it has been posted elsewhere.

David Trew leaves CMC Markets after overhaul | The Australian

Would be interested to hear about anyone's experiences.

If anyone out there is trading CFDs, hope you are being very careful!

 

Hi C3PO,

I've never traded CFDs personally. Warrants and options are exciting enough for me. Whenever people mention CFDs I try and run for the hills. CFDs let you put down a couple of percent for 100% exposure, which means your massively leveraged. Even in margin lending you have to put down more collateral (usually 25%) have a read of CRCs recent posts and what he thinks about leveraging for margin lending...With CFDs there is even more risk due to having a higher rate of leverage.

As CFDs are so risky, it is common to hear them likened to gambling as opposed to investing.

Cheers,

Dan

PS This is general information. Before making an investment decision speak to your FPA registered Financial Planner.

 

If you are going down that path, I would say options are a better choice, as your loss is limited to the price of the option.

With CFD's your loss is unlimited.

 

I have a few mates that have played around with CFD's, one has done quite well with it, but he has definitely had his ups and down, though he took it quite seriously, did lots of research attended quite a few seminars and coaching classes etc etc.

I also have another couple of mates who played around with CFDs but have lost big in the last few months with the laregely unpredicatable violitility. One of which was almost completely wiped out with just one trade.

Unfortunately none of them have had the capital behind them to diversify and reduce their risk and as much as they try to study the market and keep up to date with everything the reality is they are just too inexperienced and aren't exactly on the pulse.

I personally think CFDs are great tools for leveraging to make serious gains, but you have REALLY know your stuff otherwise it really just is like gambling on a 30 to 1 horse at the track.

 

I wouldn't touch them myself, for the simple reason that because they are OTC traded derivative you are completely dependent upon one single counterparty (your CFD 'provider') to exit a trade.

So, one of the most important aspects of trading a derivative, liquidity, is completely lost - you would be at the mercy of your provider if you needed to exit a trade that went the wrong way.

 

discipline

the thing is with CFDs is you can set guaranteed stop losses, particularly useful for big overnight drops you can't do anything about. But you have to be very disciplined.

 

Yes, you can set stop losses with CFD's. But you can also set stop losses with any type of financial instrument, futures/warrants/shares/etc

But with a CFD, you trade the instrument with a single counterparty, your CFD Provider. And then you park your stop loss with that provider.

So you would need to have an enormous amount of trust in your CFD provider.

Personally I would prefer to trade in an open market where there is no dependency issue on a single counterparty.

 

Guaranteed stop loss

but i am getting a direct feed from ASX for the prices and my provider guarantee the stop losses

 

That's great for you! You must have a good relationship with your provider, which is excellent.

So, just out of interst, which CFDs you are trading and how you are achieving your excellent returns??

 

mainly australian shares and a little fourex mainly in the GBP/USD, EUR/USD - USD/JPY, USD/CHF pairs. I have subscriptions to International Stock Report and i get Morningstar and a few other reports, then apply my own rules. This month has been the quietest, not losing trades but very few trades obvious winners, i am awaiting the new low, and now looking at some shorts again

 

Cool -

Just curious, what sort of interest rate you receive on short positions, and what are receive on long positions? I'm interested to know if there is a differential.

Esp for shares .... I am interested to know why you would say go long a CFD position and pay interest to the CFD provider as opposed to borrowing a margin loan and buying the stock in the open market? How do these alternatives compare?

I can certainly understand why you short a CFD, receiving interest plus a capital gain in a falling market is certainly an attractive proposiiton. Do you find that your provider gives you a level close to actual ASX traded levels if you get stopped out on a CFD trade?

Also curious to know how long you tend to hold positions for?

 

On short positions they pay the current rate less 2% divided by 365 per day on your total position. Similarly on long positions it is the cash rate plus 2% divided by 365 per day on your total position per day. So for instance on a $400 investment by me with 10% margin my total position is $4000 so on a long position I pay the current cash rate, 5.25% plus 2%. ie $4000*7.25%/365 = $.795 per day.
I am usually working on a 10% margin (this is set share by share and related to volatility) which is a lot more than most margin lenders allow and I have complete flexibility with what I buy and sell. In addition the positions I take are usually only one to three days. I can set stops as little as one cent but for guaranteed stops it is most often 5%. The prices I am trading on are based on a direct ASX feed so it is almost always as close as you can get on the open market.
I hold open position as short as a few hours to as long as a week but never over a weekend, depends on how it goes. I am looking for a 10% increase or decrease on a short trade to double my investment and then i get out. But I always cut my losses early if I see a trend.
So it is not just a sit back and wait activity I have to monitor it all the time. I can trade off my mobile phone and I can set advice points on shares so I am advised by SMS when they are reached.
Lots more to it but this is the basis

 

Redman, thanks for the info - I can see why some people have lost a lot of money on these things. Only 10% margin is extremely aggressive, even when compared with commodity futures etc.

Sounds like you are a very disciplined trader.

So under the current scenario are you prevented from short selling completely or is it still possible?

 

Short trading has been allowed since last week so i am anticipating some short trades this week. Except of course on financials, but still leaves lots of opportunities