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Darryl Nagel In my article in newsletter #132, I explored the opportunity provided by CFDs for traders to gain important trading experience. CFDs are very flexible in that you are able to trade with as little as 1 share CFD.
It is important when trading CFDs that you are disciplined in applying stops. This is because CFDs are highly leveraged, resulting in the management of risk being of paramount importance.
When starting out, look at risking a very small amount on each trade. This way you will be focusing on gaining skill without worrying about losing too much of your trading capital. In addition, by trading you will become aware of your emotions and your discipline (or lack of).
The chart below shows a recent example of trading CBA share CFDs on a daily chart. The ABC methodology as taught in the Trading Tactics seminars conducted by Safety in the Market is used.
Chart
click chart for more detailThe first step is to identify the maximum amount you wish to risk on a share CFD trade. In the above example the amount to risk on the trade is $50, excluding commission and financing costs.
The next step is to ascertain the risk per share. At the 25% milestone the chart shows a limit of $40.07 (by rounding up to the nearest whole cent). My stop loss will be placed 1 cent below the low of the C bar at $39.43. The risk per share of $0.64 is ascertained by deducting the stop loss of $39.43 from the limit of $40.07.
The number of CBA share CFDs to buy is derived by dividing the trade risk of $50 by the risk per share of $0.64, being 78 share CFDs.
The entry point for this trade is $39.81 being 1 cent above the high of the C bar. The entry limit is $40.07 being 25% of the range from the A bar to the B bar. The actual entry point for this trade is $39.95 being the price on the open of the next trading day after the C bar. The actual risk per share is $0.52, being $39.95 (entry price) less $39.43 (stop loss). Therefore the risk for this trade is $40.56 ($0.52 [actual risk per share] multiplied by 78 [number of CBA share CFDs]).
Profit is taken when the price reached $41.94, being 100% of the range from the A bar to the B bar.
The gross profit on this trade is $155.22 ($1.99 multiplied by 78).
The net profit of $131.99 is made up as follows:
| Gross Profit |
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$155.22 |
| Less: |
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| Commission on entry (.3%) |
$9.35 |
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| Commission on exit (.3%) |
$9.82 |
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| Financing costs (7.75%) |
$4.06 |
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| Total costs |
$23.23 |
$23.23 |
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| Net Profit |
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$131.99 |
The margin for this trade is $155.80 (5% x $3,116.10). The % return on investment for this trade is 84.71%.
Share CFDs provide an excellent opportunity to gain leverage while risking a manageable amount of capital. It is most important to place a stop loss order with your broker when entering a share CFD trade.
Remember: Always trade with discipline.
Darryl Nagel
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