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Tags: advanced options home study course, diamond group coaching, options 101 free course, options university, options university diamond group coaching
Posted in Stocks · September 4th, 2010 · Comments (0)
Trading mistakes can easily be made by even the most experienced professionals. Most mistakes made by traders come about because of a lack of research, knowledge or discipline. Whilst it is very important learn from your mistakes, it is even better and much cheaper to learn through the mistakes of others.
Below are some of the more common errors made by CFD traders:
1. Extreme Gearing.
One of many key benefits of CFD trading is the ability to gain exposure to a equity, index or currency contract with a relatively small capital outlay. Instead of having to pay for the total notional value of the Contract for difference position CFD traders can enter into positions with margins as little as 5% or even less. It is important to note that although a smaller capital outlay is necessary to open the position the CFD trader continues to be subjected to the price movement of the equity CFD for the full notional worth of the position. A CFD trader trading a Contract for difference at 5% margin is leveraging their initial outlay by 20 times, meaning a $5,000 deposit could be used to open a $200,000 CFD position.
Since only a portion of the face-value of the trade is outlaid when buying and selling Contracts for difference a small price change might result in sizeable gains but also considerable losses. For instance when trading a CFD on a margin of 5%, a price rise of 1% in the underlying instrument may lead to gains of 20%, however, if the price fell by 1%, it might result in a loss of 20% of the total amount necessary to open the position.
You should remember that leverage is often a double-edged sword not only can it work for you but if not handled properly it can also work against you, often newbie trades ignore the fact that if unmanaged gearing can result in significant losses.
2. Not understanding the impact of trade sizes on your account
Because of the leverage associated with CFD trading, relatively small outlays can lead to sizeable moves in your whole account balance.
For instance buying 10,000 CFDs priced at $2.40 with a margin of 5% necessitates an outlay of only $1,200. With an outlay of only $1,200 you can hold a $24,000 CFD position. Should the price of this position move one cent it is going to 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 price of the position fell by a similar 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 exact 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 full 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 should work out the exposure of your trade size ahead of placing the trade. It is not uncommon for newbie CFD traders to simply trade the maximum size available to them based on their account balance without taking into consideration the amount of market exposure associated with the position.
There are a selection of methods traders can adopt in order to calculate position size. A simply strategy is to work out an appropriate amount 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 based on your stop-loss price. For example, if the CFD was priced at $1.40 and you stop-loss was at $1.15 your risk amount would be $0.25, to determine your position size you would just divide the loss you would be prepared to adopt by the risk amount. In this case this would be $200 / $0.25 = 800, therefore your position size ought to be 800 units.
The method outlined above is known as fixed fractional position sizing in which a certain percentage of the overall account balance is risked on each trade. Other methods include allocating a set dollar quantity to every trade, buying or selling a fixed number of CFDs in each trade or varying the size trades depending on the profitability of your account.
Using a position sizing strategy will help you avoid the mistake of placing all your eggs in a single basket.
Tags: CFD, cfd trading, cfds, contract for difference, contracts for difference
Posted in Stocks · September 2nd, 2010 · Comments (0)