CFD trading update - play money

As most of my investments are long term 'set and forget' style (as I have a long term investment time frame and want to minimize fees, trading costs and 'churn'), I have a CFD trading account with Cityindex that I can use to 'play' at trading whenever I get bored with just tracking my NW each month. Even with that 'trading' account I've slowly gone from taking short term positions (having had very mixed results with my results at 'day trading' - aka "I don't know what the hell I'm doing") to having a couple of long positions that I'll leave open until the current up trend seems to have broken.

I've had a few Berkshire Class B CFDs for quite a while, and recently did some short term trades in Tesla (which I managed to eventually close out without losing money) and Google (which actually made a small profit when my stop loss closed out my long position at a small profit). I waited too long to reopen my position in Google after the price dip, so I've now just bought a few long CFDs in the iShares US Technology ETF.

I probably won't close out these positions (unless there is a market correction or the US looks like heading into a recession) as the margins are small enough to allow for some significant price dips without forcing me to sell, but I'll monitor the daily price movements just to give me something to do. The amounts involved in my CFD account are quite trivial - a balance of around $1,000 and daily movements of a few dollars up or down.

The movements in the Vanguard high growth fund (where we have about $1m invested in our SMSF) are material to my NW, but as I intend to hold that position (and add about $2K each month via super contributions) until retirement and beyond, the monthly tracking of the daily price movements are more of an academic exercise.

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CFD Trades

I have a small account (currently around $300) with CityIndex so I can trade CFD's when I get bored (stops me mucking around with my asset allocation in our SMSF or other investments). I had a long position in a diamond CFD (GEMS) and also in crude oil. I decided to sell the GEMS CFD as it had been heading the wrong direction for quite a while and there didn't seem to be any indication that it would soon turn around. And while oil has been doing well, I decided to take a profit and close out that position too.

I had been thinking about going short on Tesla, but it has already come down quite a lot from last year's highs, and although I don't think it will do a well as Elon keeps promising, from here it could go either way, depending on how things turn out during 2019, so it seemed to much of a speculative gamble. The other CFD trade I had in mind I did go through with - going long on the Berkshire CFD. Although it has gained a lot over the past couple of years (I used to have a direct investment in Berkshire shares a few years ago, but the trading and holding costs with a US broker, and the tax complications, made it too much like hard work so I got rid of all my direct US share holdings), it has a great track record and should continue to do well (although there may be a temporary dip when Buffet retires from active involvement or dies). We'll see how well it does over the next 5-10 years.

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CityIndex CFD Trading

My CityIndex CFD trading account has been inactive for nearly a year (I had open Long positions in the ASX200 share index, and in crude oil), so they sent me an email notice that a) if an account is inactive for more than 12 months there is a fee charged, and b) that if I did three 'round trip' trades I would get $100 credited to my account. Since I have to do some trades to avoid the inactive account fee, I decided to do the three trades. My first new trade was similar to my existing ASX200 position, I simply bought the minimum quanity for the ASX200 SPDR CFD. For my second trade I bought a tranche of Gem Diamonds CFD, as there seems to have been a dip in the long-term up trend. For my third trade I have shorted the Tesla CFD (although the market was closed when I entered my trade, so it hasn't been executed yet) as it seems to have been drifting down for the past year, and recent movements of top executives and quirky behavious by Elon Musk suggest this stock could head further south for a while.

Anyhow, these trades are speculation rather than investing, so if I'm lucky and I make a profit I'll close out the three new positions to meet the 'round trip' requirement to get the extra $100. I'll keep my long positions in the ASX200 and crude oil open until it seems to be a good time to close out.

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Will the AUD be worth more than the USD?

Not so long ago the AUD had gone from around 50c US to close to parity with the USD on the back of the commodity boom turning into a commodity bubble. The GFC pricked that bubble and last year the AUD had dropped back into it's traditional 70c-80c US range. Now the AUD is back over 90c US and many pundits are predicting the Aussie dollar will soon reach parity with the USD. This time around I think there is a good chance the AUD will soon be worth more than the USD and it could probably stay that way indefinitely. The USD is under pressure due to the US Federal deficit reaching massive levels (around US$4,500 per capita in the past year, and likely to accrue to over US$25,000 per capita over the coming decade), which could well lead to an inflation problem in the US once the economic recovery gets underway. On the other side of the equation, commodity prices are likely to remain high as the global economy recovers and demand again starts to pick up while supply constraints are still evident for many commodities (Oil isn't the only commodity likely to see production peak in the next decade or two).

I've had a couple of attempts of making some money from these expected long term trends, but going long with AUDUSD forex and the Crude Oil price trading CFDs on my City Index and CMC Markets accounts didn't work out due to short term fluctuations and trend reversals exceeding my expectations. Although I had opened an oil position at around USD51 and bought the AUD around 68c US earlier this year, both positions were closed out when temporary dips saw my margins evaporate. My trade execution and risk management still needs improving.

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Using CFDs to add gearing to our SMSF fund

So far we have invested our SMSF in the Vanguard Highgrowth fund, whose asset allocation is mostly the Australian and International share markets. Despite the recent poor performance of stock markets around the world, I'm still of the opinion that, in the medium- to long-term, this asset allocation is most likely to provide the best return for the amount of risk we are comfortable with. In fact, given that the Australian stock market appears to have possibly bottomed out in March, we have opened a CFD trading account with Commsec for our SMSF. I intend to buy a single ASX-200 index CFD (IQ) to add a modest amount (around 10%) leverage to our SMSF stock market investment. The margin on the index CFDs is 10% and each IQ CFD has a contract value of 10x the index. So, if the index is 4,000 the CFD contract value will be $40,000 and the initial margin required to buy 1 IQ CFD will be $4,000. Basically, the cost of the IQ CFD is the index value expressed in AUD, and every point movement in the index corresponds to a $10 gain or loss. So, if the ASX-200 index goes up 5% you will make 50% profit on your initial CFD purchase, and if it drops 5% you would lose 50% of the amount invested. We have transferred $5,000 from our SMSF bank account into the CFD trading account, and will buy one IQ CFD. The extra $1,000 would only be enough to cover margin calls if the index drops less than 2.5% from the level at which we buy in, so we'll have to keep a few thousand dollars in the SMSF cash account to cover potential margin calls.

When I initially applied to open an ASX CFD trading account, the index had climbed from below 3,500 to around 3,800. Unfortunately the first lot of paperwork from eSuperfund (our SMSF administrator) was incorrectly filled in for Comsec share CFD trading, not the ASX CFDs (which include index CFDs). In the few weeks it has taken for the correct paperwork to be completed and processed the market has risen to 4,070. It would have been nice to have bought the IQ CFD at 3,800 as we would now be sitting on a $2,700 unrealised profit to act as a buffer in case the market pulls back. As it is, I'm hoping we get an opportunity to buy in when the market has another bad day.

The brokerage costs for trading ASX index CFDs appear to be relatively modest, and the holding costs appear to be around 1.5% pa above the overnight cash rate. I'll find out exactly what the total cost is after we've bought a CFD and held the position open for a year.

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Comsec Margin Lending Customer Service dives along with the market

Big Banks are often accused of treating their customers with contempt when chasing profits. Comsec Margin Lending just provided a fresh example of this. When I logged in to my margin loan account this morning to check how close I am to getting a margin call, I noticed this new notice appearing on the "welcome" page:

"Loan Summary:

If you trigger a margin call that is below $5,000, please expect an SMS text message as notification of that margin call. Failure to act on this SMS notice will result in a sell down of a portion of your portfolio to cover the appropriate margin call obligation.

It is your responsibility to provide us with your latest contact details. Failure to do so may result in you not receiving notification of a margin call. To update your contact details, simply click on ‘Profile’ under the ‘Quick Links’ section on the top left of the website."

In other words, since they don't have my mobile phone number on record (and it's often turned off anyhow), I may not get contacted before they start liquidating my investments to meet a margin call!

In contrast, I have a very small CFD trading account with CityIndex that I opened with just $100 (and got another $500 added to the account by CityIndex for opening an account after attending their seminar). I had created a portfolio of ten Australian stock CFDs in that account, and the market crash of the past two weeks saw it get a couple of margin calls, then get liquidated (I owe them just over $100 now to settle the account). However. even though the account was for a Small amount, and the margin call was only $100 or so, I received several liquidation warnings from CityIndex via email AND I received a phone call from a real human being to warn me that I had a margin call to meet to avoid my positions being liquidated.

Compared to that, the customer service at Comsec is really poor.

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Forexplosion

More of an implosion, actually. After slowly trading my CFD account back up to $3,300 during this year (with some hope of recovering my initial $5,000 stake by year's end), I had a big loss a week ago when the Aussie suddenly dipped against the greenback. I managed to pick the wrong directional moves several times in a row, ending up with less than $2,000 in my account by the start of last week. Foolishly I then increased my contract size from $25K to $150K in an attempt to recover my losses if the Aussie resumed it's trend towards parity with the USD. For a while this high risk approach appeared to have paid off, with the AUD reaching close to 98c just prior to the release of the latest inflation numbers last week. My account balance had recovered to just under $3,000 and I started thinking about reducing my position from $150K to my usual position size of $25K or $50K. Unfortunately I decided to "hang in there" for just a little bit longer...

Of course the Aussie dollar then plummeted overnight, and continued dropping even when the inflation numbers came out slightly higher than expected (which theoretically should have increased the chance on another interest rate rise by the RBA, and hence boosted the AUD vs USD). Having rapidly lost $1,000 I decided to keep the position open in the hope that there would be a rapid rebound. But eventually I gave up and closed out the position when my account balance was down to only $700. I then bought the AUD again when it had dropped another half a cent and seemed to have bottomed out. This turned out to be a false bottom and the Aussie broke through the bottom of the long term up trend and my position got closed out with a residual $190 in the account, which I'll have to cash out. It's nice to imagine that if I just added a little bit more to my account and resumed trading I could eventually recoup my losses - but that's the siren song that lures gambling addicts to their doom. I'd rather just cut my losses and run.

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CityIndex CFD Portfolio

I decided to create a portfolio of CFDs for the ASX20 stocks (top 20 Australian listed companies by market capitalisation), exlcuding the financials. This provided a list of ten stocks and I bought enough units of each stock CFD to give them equal weight in this portfolio. Overall the contracts have a value of approx. $3,000 worth of shares, and the required margin is around 10%. This used up approximately $300 out of the $400 account balance I had before making these trades. Combined with the $100 'credit' allowed on this account it means that these stocks could drop by around 8% before my account would be liquidated (and I'd end up owing CityIndex $100). On the upside, if the market recovers from here, a 10% gain would boost the value of these stocks by around $300, giving me a ROI of around 100%. It illustrates the extremely geared nature of using CFDs for "investing" - hence the reason they are mostly used for speculative day trading.

It will be interesting to see how the interest charges work out in practice. In theory interest is charged on the entire value of the CFD contract (not just the margin value), and the rate is a few percentage points above the RBA overnight cash rate. However, in practice interest charges are debited daily, and on the small amounts due each day on $3,000 worth of CFD contracts rounding to the nearest whole cent could have a significant effect. After one month I'll add up all the interest amounts and work out the effective interest rate being charged. I'm hoping to just hold on to these positions for a long period (rather than actively trading), so the interest charge will be important.

After the latest trades my CityIndex CFD portfolio is as follows:

Currency AUD
Cash Balance 411.56
Open Equity -14.72
Net Equity 396.84
Credit Allocation 100.00
Margin Requirement 286.89
Trading Resources 209.95
Account Summary
AUD 484.49
USD -85.05

CFD Trades
17 Jul 2008 BHP Billiton (AUD) CFD___ Buy Market _8 @ $38.03 $304.24
17 Jul 2008 Brambles Industries CFD__ Buy Market 44 @ _$7.90 $347.60
17 Jul 2008 CSL CFD__________________ Buy Market 10 @ $34.94 $349.40
17 Jul 2008 Foster's Group CFD_______ Buy Market 75 @ _$4.61 $345.75
17 Jul 2008 Rio Tinto (AUD) CFD______ Buy Market _3 @$117.16 $351.48
17 Jul 2008 Telstra Corp CFD_________ Buy Market 80 @ _$4.30 $344.00
17 Jul 2008 Woodside Petroleum CFD___ Buy Market _5 @ $59.24 $296.20
17 Jul 2008 Woolworths (AUD) CFD_____ Buy Market 14 @ $25.50 $357.00
17 Jul 2008 Wesfarmers CFD___________ Buy Market 10 @ $32.53 $325.30

Although the US and UK markets were up on Thursday night, the Australian market dropped on Friday - mainly due to the resource stocks which are a significant part of this portfolio. Therefore the portfolio had lost $14.72 the first day. If the Australia market doesn't bottom out soon this could be a very short-lived experiment.

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Playing with my CityIndex CFD account

It's gotten a bit boring watching the value of my geared stock accounts drop further and further each day. And in the past couple of days my Forex trading with CMC Markets has also given back the gains I'd made so far in July, and the latest monthly valuation figures for my real estate show an overall decrease.

So with all the doom and gloom around I decided to take my mind off the woeful state of my investments by dabbling a bit more with my CityIndex CFD account. I didn't like my earlier trades of commodities (gold and oil) on this account, as the minimum contract size was too large compared to the modest value of this account ($250 I initially deposited plus another $250 "bonus" money credited by CityIndex for opening the account). Today I thought I'd use the account to buy into the Australian stock market at it's current level, so I hunted around for a proxy for the overall market. The actual ASX200 futures contracts might suit, but I thought I'd start out by simply buying the minimum 1 unit of Australian Foundation Investments Co (AFI) CFD. AFI and ARG (Argo Investments) are listed investment companies that act a bit like a managed fund and perform very similar to the overall market (see the charts below), but with much lower fees than managed funds. The CityIndex stock list included AFI but didn't show ARG, so I decided to buy the minimum quantity if AFI. The stock was trading at $4.64 and the CFD for this stock has a margin requirement of 15%, so buying 1 unit cost $0.69 of my available funds (approx. $411 at the moment). Having confirmed the low amount of money required to buy a unit of this stock, I was intending to top up my holding to 100 or 200 units of AFI if it dropped a few more cents. However, the stocks CFD listing suddenly disappeared off CityIndex screen, and can now only traded by phone! Although CityIndex touts it's web-based trading platform as being much more dynamic that the java app provided by other CFD providers (such as CMC Markets), I'm finding the ability for stocks to be added (and removed) at will by CityIndex to be more of a nuisance than a benefit.

Anyhow, I then bought one unit of Westfarmers just before the market closed for the day. I'm not sure whether I'll buy a few units of various Australian stock CFDs and create a virtual diversified 'portfolio' in my CityIndex account, or if I'll have a go at trading the ASX200 futures CFD. Anyhow, this account only involves a few hundred dollars of 'play' money, and will give me something to fiddle with while ignoring the large changes in the value of my long-term stock and real estate investments.

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Forex CFD Trading Update: Jun 2008

My AUDUSD CFD trading on my CMCMarkets account went well during the month of June - about the only thing (financially) that was positive about June 2008. My account balance finished at $2938.81 - a gain of $650.29. I traded less frequently than the previous couple of months, keeping winning positions open a bit longer while the trend continued, and only doing short-term trades while I was watching TV in the evening and could keep an eye on the price action.

I did a bit better using stop and limit OCO orders for positions kept open overnight or while I was at work this month - one useful tidbit of information provided at the CityIndex seminar was to set stops based on the recent market volatility, rather than stick to a set stop of say 13 pips from my order price. The limits were generally set based on recent resistance levels. A couple of times the trends reversed just short of my limit, and I had to take a smaller profit later on (when I was back at my PC), but at other times the limit closed out my order just before the trend reversed, which was very satisfying.

Overall my CFD trading with CMCMarket had produced a net loss of just over $2,000 (~40%) since I started trading in April '07, but this calendar year I've made $1,738.56 net profit, and my net loss for the financial year ending 30 June was only -$290.26. If my forex trading continues to be mostly profitable from now on, I might break even sometime this financial year.

It's interesting to note that excluding the cost of the 2 pip buy-sell spread incurred on each trade I would already be in positive territory. That's one reason that I'll stick to my CMCMarkets account for forex trading and only use my new CityIndex account for trading Stock indices or commodities - CityIndex spread is 3 pips for trading the Aussie. So far I've dabbled in crude oil and gold CFD trades with my new CityIndex account, and managed to lose around $100 of the "free" $250 provided by CityIndex in just three trades! The minimum gold CFD is a bit too costly relative to the meagre $500 "seed" money in that account, so I'll probably stick to trading the ASX index in the evening - trying to pick the rebound in the ASX that often occurs if the Australian market has been sold down during the day, and the DOW opens positively overnight. We'll see how that theory works out.

I'll start tracking my Index CFD trading results from next month.

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First Trade with CityIndex

After opening a CFD trading account with CityIndex at the seminar we recently attended, I funded the account with $250 via BPay. A few days later the money still hadn't been credited to my CityIndex account balance, so I had to email customer support to find out what was going on. Apparently CityIndex has been having problems processing BPay payments (!), but everything was fixed up after a couple of days. The $250 bonus was also credited, so I had $500 available for trading. My first trade was to sell one US crude oil CFD, and I closed the position a few minutes later for a one pip profit, netting me a massive US$1 profit ;)

I haven't decided yet what I'll use this CFD account for in the long run - last year I would have used it to sell Australian Index CFDs to hedge my Australian stock portfolio, but it's too late for that now (hopefully - I'm assuming that we're close to the bottom of the bear market in Australia). I was thinking of using it to buy CFDs for Berkshire Hathaway instead of buying the stocks using my Comsec-Pershing account, but it isn't one of the US stocks currently available for trading with CityIndex. So, for the moment I'll just browse through the available CFDs and trade whatever tickles my fancy. As long as I only trade the minimal position each time and follow a strict stop-loss strategy I should lose too much by experimenting.

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100% return trading CFDs

I phoned CityIndex today to finalise the details on the account I applied for at the seminar last Thursday. I was then able to login to my account to change to password from the initial default value, and I used BPay to transfer an initial $250 into the account. Because I funded the new account within one week of the seminar, I should get a matching $250 put into my account by CityIndex - an immediate 100% return! Of course you can't immediately withdraw the $250 - you have to make a minimum of 10 trades before you can withdraw the "bonus" $250 six months after opening the account. At least the bonus money will give me a $500 account balance to play with - sufficient to make trades with a required margin of around $100. For an Australian stock or Index with a 5% margin requirement that would mean taking a $2,000 position.

It was interesting to see the the CityIndex application pack included forms for opening a CFD trading account on behalf of a superannuation fund. Although the trust deed of our SMSF is probably broad enough to allow 'investing' in CFDs, I wonder how the trustees (DW and I) could justify trading such highly geared instruments within our investment strategy? Rather than purely speculative day trading CFDs, you'd have to execute a much more considered strategy with controlled risk - possibly pairs trading, commodity stripped investment in mining companies, or some such.

I don't think we'll use CFDs as part of our superannuation investments, but I may do some modelling to see 'what if' you used CFDs as a highly geared way to invest in the stock market index. For example, if you invested half you funds in a high-interest online cash account, and used the other half to invest in index CFDs (buy-and-hold, rather than trading), how would you have fared
over various 10-year periods since the 1970s? CFDs have an implicit interest cost of the overnight cash rate + 2%, so I should be able to get daily data for the AllOrds Index and cash rate since 1970. It will be interesting to see how this strategy would have performed in different market conditions, and the effect of the proportion of total funds invested. To much invested in CFDs would probably see your account wiped out by margin calls, and too little would see your fund return remain close to the cash rate.

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Money for nothing, and FX for free

DW and I attended a free CFD trading seminar provided by CityIndex this evening. It was held at the Sofitel Wentworth hotel this evening, and attendees received a bonus $250 match if they opened an account and fund it within a week of the seminar. Those who applied for an account then and there also got a free one year subscription to Wealth Creation magazine (I think that's the title). Since we are already trading CFDs with CMCMarkets, and weren't entirely happy with CMC Markets trading platform, it seemed like a good idea to apply for accounts on the spot. DW and I have our own trading accounts, so we each applied for a CityIndex account. Hopefully this will mean we get $250 each credited to our new account. You have to put at least $100 into a new account, and the offer is a dollar-for-dollar match up to a maximum of $250.

The CityIndex trading platform looks pretty cool, and has a few nice features that CMC Markets doesn't provide. It allows you to set stop and limit prices in the same screen that you setup an order, rather than having to do a trade first and then create a stop, limit or both (OCO) order subsequently (which is they way it's done using the CMC platform). The CityIndex platform is web-browser (IE) based, so you can login and trade on your account from any PC. The CMC Market platform is a java application that has to be downloaded and installed on each PC you want to use for trading. This also makes the CityIndex platform easier to update, and it seems more 'modern' overall. Another nice feature is that you can edit existing stop/limit orders (eg. reset the stops as a trend continues). This is a lot more cumbersome with the CMC Markets app, which requires you to cancel an order and then create a new one if you wish to change to settings.

One disadvantage with CityIndex CFD trading is that the buy/sell spread for FX trades is 3 pips - compared to only 2 pips with CMC Markets. However, CMC acts as a market maker, and does not have to set prices that exactly match the physical market price, which could end up costing more than the 1 pip difference per trade. At the seminar we were told that they may soon be reducing their FX buy/sell spread to 2 pips at some stage. There is also a software enhancement in development to provide dynamic stop/limit orders (where you can have the setting automatically change as the trend continues, but remain at their maximum values during any reversals).

CityIndex doesn't charge any extra fee for trading stock and index CFDs (CMC Markets charges a fixed $40 fee per month for accessing the Au stock market data), so I may use my CityIndex account to also trade the Australian ASX200 index. It would have been nice to have had this setup last year - I could have sold the index when my Index Put Options expired, and therefore been 'insured' against a large part of the losses suffered by my Australian stock portfolio this year. A case of saving $40 per month ending up costing me tens of thousands of dollars!

CityIndex should be in touch with us tomorrow to provide the remaining details required to open our accounts, and we should be able to fund the account with $250 and start trading in a few days. I'm not sure if I'll switch my forex trading from CMC Markets to CityIndex, or just use the new account for stock and index trading. I may replace my expensive Comsec/Pershing account with CFD trading for my US stock positions - now that I'm no longer trading small-cap stocks selected using the "Little Book that Beats the Market" method, and sticking to large-cap stocks such as Microsoft and Berkshire I should be able to access them via CFD trading. I still need to check into the full details of the cost of using CFDs for holding long term positions. The nominal interest rate with CityIndex (2$ above the reserve bank overnight cash rate for borrowing (going long)) appears to be comparable to the current cost of funds used in my Comsec/Pershing account. However, the interest is charged on the full position value (not just the 'borrowed' amount). Since CFD trading uses a margin (your funds) of around 3%-10% of the position, this will mean a slight increase in the effect cost of the 'loan'. Also, with interest being charged daily on positions held open overnight, there may be extra costs due to rounding of the interest charged each day.

Anyhow, I never quite worked out the real interest rate applied when I held positions open with CMC Markets overnight - although
they also quoted an interest rate a couple of percent above the overnight cash rate, in practice the rollover charge when I kept positions open several days seemed to always be a fixed fractional number of pips, rather than an interest charge based on the current cash rate. I'll probably have to make a small test trade with CityIndex and keep it open for several days before I can be certain how interest is really calculated and charged.

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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.

Subscribe to Enough Wealth. Copyright 2006-2008

CFD trading platforms

I use CMC Markets for trading Forex, but there are many different CFD trading platforms out there. One of the CFD Providers available to those wishing to trade contracts for difference in the UK is One Financial. This online stock market trading broker provides all the major CFD markets, and has good coverage of energy, forex, hard and soft currencies, international indices, stocks and ETFs.

They claim to have some of the tightest spreads, lowest margins and fastest execution available in the market for trading CFDs with their award winning browser-based trading software. It provides free charting, news, and analytics. And users can access 24 hour customer support via chat, phone or email.

The easiest way to compare stock trading programs is to take them for a test drive. So it's nice to be able to sign up for a demo trading account in a few seconds with minimal information. The email with my demo account login and password hadn't arrived after an hour, so there is probably some human vetting of demo account requests involved. I requested a demo account with the minimum $10,000 balance, as that is similar to the amount (A$5,000) I trade for real. "Paper trading" is a good way to get used to the tools and practice implementing your trading plan (eg. stop and limit settings, trade size compared to total margin), but it's not the same a trading money for real. By using a demo account balance close to reality you can get a better impression of the potential gains and losses you may experience during trading CFDs. If nothing else it's good fun to experiment with CFD trading strategies using a demo account - when my demo account email arrives I think I'll let DS1 have a play with the account and learn about charting, calculating profits, and the various trading markets.

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Forex CFD Trading Update: April 2008

April continued my run of profitably months trading AUDUSD foreign exchange rate (the "Aussie"). I continued trading the minimum contract size (A$25,000) and using OCO (One-cancels-other) stop/limit pairs when I left a position open unattended (eg. while at work or overnight). Depending on volatility the stop-loss order would be priced 10-20 pips from my entry price, and the limit price (to take a profit) at least 30 pips from the entry price. The limit was set based on recent charting behaviour - resistance/support levels, previous retracements etc. Attended open positions were often much shorter opportunistic trades, where the price had dipped 10-15 pip below the trend line, and had started to retrace. Often a small profit of 5-10 pips (worth $12-$25) could be made in a few minutes. I think I overtraded a bit this month as the number of trades was higher than previous months, and the average profit per trade was very low. This month I'll try to only trade when there seems to be a clear opportunity, and also try to let my winning trades run a bit longer (probably need to cancel and reset my OCO orders when I'm approaching my limit).

I don't have figures on the win-loss ratio of trades as I sometimes open a second trade overlapping the previous position, so I have to manually sort through and pair up my trading history to determine the result of each trade pair. I did that for last financial year (up to 30 June), and I'll get the figures up to date before the end of this FY. Meanwhile I can get the overall profit(loss) and number of completed orders from the CMC Markets monthly account summary.



Copyright Enough Wealth 2008

A monkey learns to type Shakespeare while nailing jelly to a tree...

That should give you an accurate mental picture of my attempts at day trading forex (AUD vs USD aka. the "Aussie"). Although I haven't updated my trading spreadsheet with individual trades past the end of last financial year (30 June), I have now plotted monthly totals to see how I've performed in my first year trading Forex - not too flash overall, although the trend has at least been in the right direction so far this year:



I initially started with a $1,000 account with CMC Markets in March 2007, but trading losses in April and May forced me to choose between cutting my losses and stop trading altogether, or throwing some good money after bad. I eventually decided to add some more funds to my CMC account and keep on trading. Of course I promptly lost this extra $1,000 trading during June and had to "top up" my account with another $1,000, and then another $1,000, and another. By September I had "invested" a total of $4,000 into my trading account, but although I had lost money overall, my trading performance had improved slightly. From losing an average of between $10 and $35 per trade in the first three months, I was breaking even in Jul, losing around $5 per trade during Aug, and then finally making over $500 profit in Sep, with an average gain of about $10 per trade.

The wheels fell off during October when I lost almost $2,000 in just 25 trades (averaging a loss of nearly $80 per trade). My account balance ended up below $250 (insufficient to trade the minimum $25,000 Aussie CFD with 1% margin), and I had learned the hard way that it doesn't pay to leave trading positions open overnight (or while at work) without using stop loss orders!

I didn't trade at all during Nov/Dec, but finally decided to put in a "last" $1,000 into my account in late Dec, and to start trading again in the new year - but with a more disciplined approach to using stop and limit orders on any unattended open positions. (Dw had talked to someone who trades Forex professionally, and we decided it was about time we watched the free educational DVDs CMC Markets had given us when we opened our trading accounts!). Part of the motivation for resuming trading was to have something to "play" with to avoid the temptation to fiddle with my general asset allocation during the recent stock market woes.

Although I still lost a small amount during Jan '08 I did at least us stops to control the size of my losses when things didn't work out as I had anticipated. Although there were times when my 13 point stop was triggered soon after I opened a position, only to see the market change direction and move in the direction I had expected, AFTER I had been closed out! I also learned to set up "OCO" (One Cancels the Other) paired stop/limit orders against my open positions. For example, if I went long $25,000 AUD at US$0.9350, I would then setup a $25,000 OCO order with a limit of US$0.9395 and a stop of US$0.9332. The exact number of "pips" I set the stop and limit from my initial price depends on the recent volatility, resistance and support levels, long term trends, moving averages etc. etc. I tend to look at all this stuff and form an overall "gut feel", rather than trading purely on the technical indicators. OCO orders are good when I leave positions open unattended - my losses are limited and I'll take a reasonable profit if the market moves in the direction I expect. Using just stop-loss orders would control my losses, but don't help when the market moves in the "right" direction while my open position is unattended, only to drop back before I get a chance to close my position. Then again, using an OCO order doesn't let "winners" run, so I tend to set the limit further from my initial price than the stop.

Trading during Feb and Mar was actually profitable, with an average gain of $10 per trade. Apr so far hasn't been as good, although I'm currently up a few hundred dollars for the month. I'll stick to trading the minimum position for the moment ($25,000) and see if I can be consistently profitable for the next few months. My "goal" for trading during 2008 is to try and average $10 profit per trade most months, avoid any months that I "blow up" and make huge losses by not trading to my plan, and hopefully end the year with close $5,000 in my account.

If I can trade my way back to my initial account balance I'll then think about trading larger positions ($50,000 or $100,000) in 2009. Theoretically performance shouldn't be affected by the size of my trades.

My monthly gain(loss) is tabulated below, which shows number of trades each month, average gain or loss per trade for the month, and cumulative trading results. Hopefully during 2008 my cumulative gain(loss) per trade will continue to trend towards $0, and eventually become positive.



Copyright Enough Wealth 2008

Paper Trade ASX CFDs for free

You can now "paper trade" ASX CFDs with the ASX CFD simulator. ASX CFDs are a versatile and flexible trading tool for the experienced trader. The ASX CFD simulator allows you to experiment with trading and experience the benefits of ASX CFDs without risking any of your own capital.

The ASX CFDs simulator enables you to:

• trial your strategies and trading techniques with a hypothetical cash balance of $100,000,
  
• set up watchlists,
  
• place trades in the top 50 equity CFDs, and
  
• view your transaction history and performance positions.
  

All you need to do is set up your simulator trading account and you’ll be ready to go. You can use the simulator as a watchlist or participate in the ASX CFD Trading games that will run throughout the year.

Copyright Enough Wealth 2007

An interesting week in the market

Well, that was an interesting week as an equities investor. After a huge drop at the start of the week, there was a run of three exceptionally positive days, resulting in the most incredible "bounce" I've seen since I started investing in the 80's.



Looks my decisions this week worked out OK
1. Sold some IPE and shifted the funds into CDF to realise a capital loss. This will avoid having to pay any capital gains tax on the profit I made on trading Centro properties.
2. Didn't panic and sell off any of my stock portfolio, despite signs of panic in the world markets just before the US Fed announced it's rate cut.
3. Added to my existing holding of CDF on Tuesday, at what turned out to be the low for the week. It's since gone from $1.66 back up to $1.85,

I also started trading forex again this week. I'm sticking to small trades ($25,000 position), and have finally worked out how to set up stop-loss pending orders using the CMC Markets interface (it's obvious once you know which icon to click on the trading window), so I'm able to trade "properly" - letting my winning trades run and automatically closing out positions for a small loss when things don't go as expected. I'm setting stops at around 12 points from my entry price, which with the AUD around 0.8840 USD works out to be 1.35%. So far I'm up around $190 this week, but I've still got a long way to get back to my starting kitty. Having put in a total of $5,000 into my trading account, the current balance is only $1,389.


Copyright Enough Wealth 2007

Twice bitten, third time lucky?

After swearing off day trading forex (having lost $4,000 in a couple of months), I've now transferred another $1,000 into my CMC markets CFD trading account. This means I have "invested" a total of $5,000 into day trading forex (USD vs AUD) and will now be starting off with a balance around $1,200. During DS1's Chinese class last weekend DW happened to talk to a lady who works as a professional forex trader for a large investment company. After sharing a few laughs at how we'd lost money trading forex in a very hit-and-miss fashion (and leaving positions open overnight), a few comments that it was possible to make money trading forex (if you trade to a plan and used stop-loss orders) was all it took to rekindle DW's interest in trading forex. I'll also start trading forex again as it's more fun if you share a hobby, even an expensive one! This time we'll first read an introductory text like "Commodity Trading for Dummies", pay the extra monthly to enable automatic stop-loss orders in the CMC Markets trading platform, and watch the 8-hours worth of "free" training DVDs we got from CMC Markets when we opened DW's account. Worst case I'll lose another $1,000. If I'm lucky I'll have some fun trading next year and might even manage to get back to break even.

The addictive thing about day trading is that you always had second (and third) thoughts about every trade you make, so when you've lost money trading you can always think back and see where "if only" you'd made some different decisions you could have made a profit rather than a loss. I'm still pretty sure that there's a lot more luck than skill involved in trading forex. If I happen to get lucky and make some money trading forex the danger will be that I convince myself that I now know the "secret" of trading and continue trading until I eventually lose whatever profits I've made. I'll need discipline to not throw any more funds into trading forex if I lose this "final" $1,000...

Copyright Enough Wealth 2007