CFD's - A Perspective
I started with CFD's near the end of the GFC while searching for the ability to make money from falling markets to support a share portfolio. I saw the start of the great bull run to USA Indexes in March 09' but because of ignorance failed to profit from it. If I had the perspective and strategy outlined in this note back then, I would be very rich now instead of just comfortable.
I fell into the traps of excess technical detail and emotive decisions, trying a variety of strategies as well as every study and overlay, trying to find the 'magic' solution. I wasted years investigating the plethora of tools and charts setups with no guide or goals. Something the providers bank on to make their money. Plenty of useless trades from which they profit. That was my fault, not theirs.
Not one single training program, book or CFD article/resource gave but a smattering of the basics of a strategy let alone a perspective. Many hundreds were reviewed including the costly ones.
Every newcomer is left to find their own way - be the opposite side of the trade for someone to profit from. Just like any investment or business, there is no free ride.
It ended up as the inevitable percentage game - percentage positive entry's, percentage profit/loss etc. and too many hours to achieve very little positive result, and in over 5 years lost about 75% of the initial stake, in between some acceptable profits. Many personal errors were made resulting in about a third of the losses (fat finger, expiry date misses, insufficient entry stop losses etc.)
The platform was very unstable as well in the early days. (CMC) It is totally reliable now.
Then came the realization that I was one of the 80% to 90% that didn't have a clue with trading the small stuff on short period charts, couldn't find a way of determining market turns (trends) at short chart periods, but could still see the possibilities, so started some in depth research of my objectives and capabilities versus what I was achieving with a portfolio.
I eventually determined that I was to be a trend investor not a CFD trader and my strategy would be:-
- Only invest in the trends that can be seen on 1 day and 1 week charts with primarily TEMA moving averages as indicators. Invest in both bull and bear scenarios but no deliberate swing strategy.
If the 1 week chart TEMA averages are still trending then stay with the trend. Only exit a trend if the 1 week TEMA average turns decisively (about 5%) Enter on retracements returning to trend as seen on 4hr to 1day charts.
- Never use charts less than 30minutes for entry/exit decisions and preferably use 2 to 4 hour charts.
- Rarely use stop losses - only for profit protection when away for a few days. If the market becomes choppy, erratic or volatile, get out until the trend re-emerges.
- Focus on the steady indexes, Forex and some commodities not the volatile commodities or VIX.
- Use progressive equal positive entry's to build to the desired investment for the trend developing.
- Never invest/utilize more than 25% of available funds - leaving sufficient room to avoid a margin call if all investments fall 5% simultaneously from all entry's. i.e. If you want to be low risk and high profit, you need to have sufficient capital available. Low capital = high risk and low profits.
- Entry's and exits to trends must be collaborated with some significant causative event, not rumor. Technical studies and overlays are only trailing indicators. They are not an end in themselves.
- I would not spend more than 10 minutes total for the day - maximum 3 times a day looking at the charts. More time and effort is to be placed in research of news for potential/causes of trend changes.
- Accept retracements to trend up to 5% in profit mode and up to 3% for the initial few entry's.
- Use multiple chart sets:- 30Min-4hr, 1day and 1 week for each investment to gain market feel/perception.
This is based on:-
- My portfolio of shares would vary between 0% and 5% up or down on any day, while the market moved between 0% and 0.5% as would the CFD equivalent. Where trading the CFD equivalent I was perceiving the changes as volatile when using < 30 minute charts - but it was stable relative to market.
- 75% of trading my losses were because of stop loss action - which in almost all cases would have turned a profit eventually. If I could accept a daily unrealised loss of up to 5% with 10 times more value of shares in a trend, why was I feeding a CFD provider with profits from hundreds of small trades with many losses?
- Playing the percentage game is a looser's game. Needing about 0.6% for a trade to be barely profitable and chasing 1% to 2% moves is about as dumb as it gets unless you have 80% very good wins, and even then it is poor performance for the time and effort.
- All successful funds use either trend or reversion to mean strategies or both. They take positions, they don't trade. They allow for large retracements to trends and only take profits when the trend is undeniably over. They largely use major trends, >5% expected moves because of fundamental changes.
- If you can see the significant profitable trend changes on 1 day or 1 week charts, then leave trading the miniscule unprofitable retracements/erratic's on < 30 minute charts alone.
- Not all investments are profitable. There will be some losses. Trading CFD's with high leverage is largely a loss making/loss control strategy. Only picking significant/major trends to follow can lower CFD leverage risk to an acceptable investment grade risk.
- Market start gaps and other timeouts become irrelevant in investing versus trading. Daily checks are sufficient to follow a trend, more is OK, but generally useless. The 1day and 1 week charts are the key.
So that is my perspective.
Treat CFD's as an investment and an adjunct to or replacement for a share portfolio and make decisions on market fundamentals rather than emotional, technical and time wasting percentage games.
I can now comfortably and unemotionally invest in $100K steps - allowing $5k retracements, before investing more when in profit mode, while building to a portfolio duplicate value level while the trend is up, (compounding) and double that value when the trend is down. (support)
With this perspective, I can easily handle 3 to 6 investments at the same time, whereas the same was not possible when trading the small stuff. All you are looking for is significant to major trends, in markets that you have some familiarity with and have a grasp of the fundamentals - at least being able to determine the causes of changes to trend direction.
Whatever I learned in the past is extremely useful, nothing was wasted - even the losses. All part of the learning experience, something that cannot be gleaned from training programs, documents or education.
Only the perspective has changed, along with a modified strategy to encompass that perspective, with little technical input other than some moving averages. The emotional highs of trading are gone but the profits are flowing again, sporadically.
The only down side is the waiting, particularly in sideways low volume markets. But that is just the same with a share portfolio - unexciting periods between moves up or down.
Obviously the futures are not the way to invest because of expiry date exits. Only the cash or market following instruments are used with their interest income and charges - which are largely inconsequential on long strong trends. Only the 6 month plus flat periods are an issue and they are usually not on trend so should be avoided/exited anyway.
This is CFD's my way. It is not the only way. I am sure a few have methods and strategies that work well for them, just as I am sure that most have losses for which they have no real answer, yet.
I do not believe there is a strategy to extract profits from CFD's in any continuous low risk way. i.e. CFD's are not a cash generating machine that can providing positive weekly/monthly income. You can only profit from specific market cycles or conditions.
I hope this can help some find their own 'perspective' and a profitable niche with CFD's as I did eventually.
