IG or Commsec

Originally posted by sharks37 ↑

Ozwell, "All I hear is CFDs are dangerous, CFDs are gambling, etc, etc." imo is a bit like people saying "guns kill people" and "eating mc donalds makes you fat" - neither are true - a gun cant shoot by itself and a single burger wont make you fat.

Similarly trading with CFDs isn't gambling. CFDs give you leverage and its the leverage that will do more damage if you dont trade successfully or if you dont factor the leverage into your trading.

So for example if you can only afford to trade a $5000 position and afford to lose 5% then:

1. If trading from a cash account you would place a trade for $5000 and exit if the trade went against you by $250.

2. If trading from a CFD account you would still place a trade for $5000 and exit if the trade went against you by $250.

Either way you should treat the trade the same, i.e. put at risk no more than $250 and exit if the position goes against you by that much. The only difference is from a cash account you will actually have to pay $5000 capital to enter the trade, but from a CFD account you will only have to pay a deposit that depends on the LVR so it may be only $500 capital that is taken from the account.

Thats for one trade. Of course if you make another 9 trades of similar value using the CFD account then of course you have just exposed yourself to 10x more risk than if you only make that one trade. Thats where people get in trouble - they dont treat the capital the same as if it was from a cash account and end up multiplying their risk.

As for stops, it is wise to always use stops, but depending on the provider that isnt necessarily a stop that you enter on their platform, it might be a mental (or written) stop. Let me explain:

Stops are a critical element of the exit part of a trading strategy. You should always have a stop just as you should always have a target, because both are part of the exit strategy which should always be part of the trade plan.

Why use a mental stop rather than an entered stop? Depending on the provider and the market you are trading if you enter your stop on their platform then you are giving them information about your trade plan - i.e. they know where your stop is and like it or not the reality is some providers "hunt" for stops and take them out when the opportunity presents itself. Therefore better not to give them that information.

Why use an entered stop then? In some markets price can move very quickly so if you arent prepared to be exposed to risk and cant keep an eye on the market, then consider an entered stop. The price is your provider knows where that stop is.

In terms of relative risk for stops getting taken out:
- The risk is inversely proportional to the distance the market price is from your stop price
- The risk is inversely proportion to the liquidity of the market (higher liquidity, lower risk & vice versa)
- The risk is higher for a market that is "out of hours" (index, commodity, forex, etc) because the price out of hours is set by the provider (the market maker) and the risk is lower during market hours (the market price is then up to the market, not the market maker)

Hope the above helps.

Cheers, Sharks.

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Why use a mental stop rather than an entered stop? Depending on the provider and the market you are trading if you enter your stop on their platform then you are giving them information about your trade plan - i.e. they know where your stop is and like it or not the reality is some providers "hunt" for stops and take them out when the opportunity presents itself. Therefore better not to give them that information.

A very good reason to never use anything other than a DMA platform.