Awesome Hank
Trading mistakes can be made by even the most skilled professionals. Most blunders made by traders come about because of a insufficient research, knowledge or discipline. Whilst it is very important learn from your mistakes, it’s even better and much less expensive to learn through the errors of others.
Below are some of the more common mistakes made by CFD traders:
1. Too much Leverage.
One of the key benefits of CFD trading is the ability to gain exposure to a share, index or currency contract with a relatively small investment. Instead of paying for the total notional value of the Contract for difference position CFD traders can enter into positions with margins as little as 5% and in many cases less. You will need to note that even though a smaller capital outlay is required to open the position the CFD trader is still subjected to the price movement of the share CFD for the full notional worth of the position. A Contract for difference trader trading a CFD at 5% margin is leveraging their opening expenditure by 20 times, meaning a $5,000 deposit might be used to open a $200,000 CFD position.
Since only a fraction of the face-value of the trade is outlaid when buying and selling Contracts for difference a small price change could result in significant gains but also substantial losses. For instance when trading a CFD with a margin of 5%, a price rise of 1% in the underlying instrument may result in gains of 20%, however, if the price fell by 1%, it might result in a loss of 20% of the amount required to open the position.
You should remember that gearing can be a double-edged sword not only can it work for you but if not managed properly it may also work against you, often novice trades take no notice of the fact that if unmanaged gearing can result in substantial losses.
2. Not understanding the impact of trade sizes on your account
Because of the leverage linked to Contract for difference trading, comparatively small outlays can result in significant moves in your overall account balance.
For example buying 10,000 CFDs priced at $2.40 on a margin of 5% necessitates an outlay of only $1,200. With an outlay of only $1,200 you can actually hold a $24,000 CFD position. Should the value of this position move one cent it will have an effect of $100 on the profit or loss on the traders account.
If the price of the this position increased by 12 cents a profit of $1,200 would have been made. However, if the value of the position fell by the same amount a loss of $1,200 would have been made.
The overall impact of any price movement will depend on the traders overall account balance. For a trader with an account balance of $1,500, the aforementioned trade would have had a significant impact on the traders account profit and loss. Should a trader with an account balance of $40,000 take the same position the impact would be much less significant.
A loss of $1,200 on a $1,500 account would result in 80% of the whole account balance being lost. However, a loss of $1,200 on a $40,000 account would result in a losing only 3% of the account balance.
3. Buying and selling in too large parcels
You will need to calculate the exposure of your trade size before placing the trade. It is common for novice CFD traders to simply trade the maximum size available to them determined by their account balance without considering the amount of market exposure associated with the position.
There are a variety of methods traders can adopt in order to work out position size. A simply strategy is to work out an appropriate quantity of risk capital should the trade go against you and work out an acceptable position size base on this.
In case you wish to restrict losses on any given trade to $200 you would calculate your position size determined by your stop-loss price. For instance, if the CFD was priced at $1.40 and you stop-loss was at $1.15 your risk amount would be $0.25, to calculate your position size you’d just divide the loss you’d be prepared to adopt by the risk amount. In this case this would be $200 / $0.25 = 800, as a result your position size should be 800 units.
The method outlined above is called fixed fractional position sizing in which a specific percent of the overall account balance is risked on each trade. Other techniques incorporate allocating a set dollar quantity to each trade, buying or selling a fixed quantity of CFDs in each trade or varying the size trades according to the profitability of your account.
Using a position sizing approach will help you avoid the mistake of placing all of your eggs in a single basket.
Tags: CFD, cfd trading, cfds, contract for difference, contracts for difference
Posted in Stocks · September 3rd, 2010 · Comments (0)
With the increase in popularity of share trading by Australian investors, it’s not unexpected that more complicated trading platforms and products are being actively used by knowledgeable investors looking for additional buying and selling opportunities. Contracts for differences, or CFDs, are a growing in acceptance in the Australian market. CFDs are derivative products whose main attraction is the large quantity of leverage they offer. Those with a strong understanding of financial markets are drawn to CFDs, because of their ease of use and simplicity. Often CFD traders are retail clients, institutional investors, hedge funds, day traders or the more savvy investors. CFDs, however, are not for the inexperienced trader or investor.
With astute traders aware of costs and their effect on bottom-line gains, the question arises regarding which CFD provider offers better value. Yearly Cannex Canstar analyses products from CFD providers in Australia to prepare its comprehensive analysis on CFD trading. CFD providers are assessed based on part-time traders and full-time traders using the Market Maker and Direct Market Access trading models. Cannex Canstar does not include newbie investors in their evaluation, as they do not believe this product is appropriate for this sort of investor.
When assessing the CFD providers in Australia, consideration is given according to their pricing for Australian equity CFDs, this includes commission and interest charges. Cannex Canstar also takes into consideration the features and flexibility utilizing their services, risk management tools, in addition to their margin requirements. The Cannex Canstar methodology consists of 200 pieces of data, making the scope of their CFD trading star ratings way more than the majority of traders could hope to compare by themselves. Their evaluation is based on CFD trading of ASX share CFDs. Cannex Canstar also gives bonus points for having access to indices and additional markets.
The Cannex Canstar rating considers the trading platform and services offered by CFD providers, incorporating order fulfillment, charting capabilities, customer support, education, account management, information, range of tradeable securities, commission, interest costs, etc. It’s not a rating of estimated returns from use of these services and by no means implies that an investor should have an expectation of positive returns. CFD trading is mostly a self-managed activity and return of profits or losses depends upon the individual investor’s judgments and behavior.
Historical winners of the Cannex Canstar awards which are broken down into two different types being Direct Market Access (DMA) and Market Maker have been First Prudential Markets and IG Markets for their Direct Market Access (DMA) package and GFT and IG Markets for their Market Maker CFD product. The newest nominee in the CFD market, International Capital Markets (IC Markets) is poised to take out the Cannex Canstar CFD awards this year with its low cost Direct Market Access CFD package for full-time traders on the webiress trading platform.
Tags: CFD, day trading, forex, shares, stock market
Posted in Stocks · September 2nd, 2010 · Comments (0)