Wednesday 4 June 2008

Forex CFD Trading Update: May 2008

My AUDUSD CFD trading produced a small loss for the month of May. I did get my account balance up to $2600 a couple of times during the month, but a couple of losing streaks offset the steady trickle of small gains. I seem to be able to make small profits ($10-$30 at a time) trading very short term gyrations (within a few minutes), but the win:loss ration is only slightly above 50% so it takes a lot of these short term trades to generate a small profit. This sort of trading requires constant attention to the price action, so the "hourly rate" is hardly worth the effort.

Longer period trend trading (loosely based on the cross-overs of short and longer period price averages, but with attempts to "pick" the turning points before they are confirmed by the charts) doesn't require constant monitoring, and the results seem promising. However, it requires setting a stop and limit OCO order for each open position, and this month I had a few too many occasions where either the stop-loss closed out my position, only to see the trend continue after the brief dip, or else the trend reversed just short of my profit-taking limit price.

Setting the stops too close means getting closed out of positions that would have been profitable if left to run, while setting them too loose means taking a big hit on the positions that turn out to have been wrong. I need to be more consistent at using OCO orders to control my risk, and resetting my OCO orders to "lock in" profits - but this isn't possible where I have positions open overnight or during the day while I'm at work. It would be ideal if the trading platform allowed you to automatically reset the stops in an open OCO order based on movements in a moving average, and alert you (eg. via sms) when the price approached the limit of your OCO order. The CMC platform currently doesn't even let you edit the stop and limit prices in an open OCO order (you have to cancel the open order and create a new order with the new parameters), but an enhancement to add this feature may be coming with the new version 5.4 being rolled out this month.

Despite losing $153.58 this month, the average loss per trade was only $1.36. Since the 2-pip buy-sell spread means that each leg of a trade is costing a minimum of $2.50 (on the minimum $25,000 CFD), my trading might exhibit some modest level of skill - albeit not enough to overcome the drag of the trading costs. Overall I've made 867 trades since opening my account. This means that CMC Markets has made at least $2,167 revenue from the spread on my trades - which accounts for almost 80% of the amount I'm down in my trading account! They also make a small profit from the interest rate differential on long and short positions being rolled over.

Next week I'm going to attend a free CFD trading seminar presented by CityIndex. It will be interesting to see what features their trading platform offers.

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Anonymous said...

CMC and all the others are making a market and providing the other side of the trade - how can you ever win? It's an old style bucket shop.

Have a look at ASX CFDs, I believe they have currencies available.

And it's a real market with multiple market makers. said...

They make a market in that there is no actual matching of buyers and sellings. However, there are enough buyers and sellers (presumably) that on average the market maker doesn't gain or lose from taking the other side of each trade. They only profit from the spread (2 pips for forex with CMC markets).

To be a 'bucket shop' implies either:

1. A fraudulent brokerage firm that uses aggressive telephone sales tactics to sell securities that the brokerage owns and wants to get rid of. The securities they sell are typically poor investment opportunities, and almost always penny stocks.

2. A brokerage that makes trades on a client's behalf and promises a certain price. The brokerage, however, waits until a different price arises and then makes the trade, keeping the difference as profit

The CFD market makers don't own any stocks that they are 'pumping and dumping' and since trades are filled immediately at the quoted price there is the timing difference required for the second type of 'bucket shop' behaviour.

Anonymous said...

CFD provides such as CMC, CityIndex and IG Markets are in no way bucket shops, in the traditional sense. They are regulated by various authorities around the world, just like futures and stock brokers. Their business model relies on churn - that is, a large number of customer trades, rather than on-selling dodgy small cap stocks. In order to prevent themselves from going bankrupt they engage in a very active hedging program. The biggest risk for these types of providers is that they allow massive leverage, which can wipe of profits very very quickly. Also, they encourage punters (they are taxed as betting organisations in the UK, not financial services providers) to trade actively, which as a lot of academic research has pointed out reduces returns. The more you trade, the lower your returns.

Good luck with trading - I was never very good at it and have gone back to buying and holding blue chip stocks.

Anonymous said...

No offence, perhaps bucket shop was the wrong label. I stand corrected.

I believe the point that multiple market makers leads to a 'fairer' market is still valid.

All the best.

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