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Now to this informative article:-

Why is everyone so intent on claiming CFD’s are evil and should not be used by the novice.

As a novice myself, having met the top 3 quotes by ingot. I can see how dangerous using Leverage is to your profitability.

Using Leverage is dangerous in any form if not used properly. I have to agree 100%

Trading Shares FPO is dangerous if you do not know what you are doing. Anyone who even attempts to do so without studying how shares move in price is bound to head down the wrong path.

The beauty of CFD’s is the cost to get in and out of them is a lot less. Especially if you have a broker who charges 0% brokerage on CFD’s held overnight. Which do exist.

When selling a short position you receive interest payments at the current daily rate. When opening a long position you pay the daily rate of interest. Small charges.

As we all know setting an exit strategy is the most important aspect in Trading. This holds true no matter what form of investment you make. FPO or some form of Derivative.

When trading CFD’s it is important to manage your risk.

You could quite easily set a rule. Do not open a position if your total Postion Sizes exceed your Total current Trading Float.

The beauty of using CFD’s is that when your stop loss moves you into a profit position, you have more money available to open a new position. Where if you were using a FPO, all your capital would be tied up in the market. Preventing you from opening a new position until you sell your current Profitable FPO.

Simple example:

$20000 starting float. Risk per Trade 2% of Float.

Buy Stock A at $36.00. 5% Margin Requirement. Stop Loss at $34.00. Buy 200 Shares. Position size is $7,200 Capital Tied up is $360 at %5 margin.

Buy Stock B at $12.00. 10% Margin Requirement. Stop Loss at $10.50. Buy 267 Shares. Position size is $3,204 Capital Tied up is $320 at 10% margin.

Buy Stock C at $50.00. 5% Margin Requirement. Stop Loss at $46.00. Buy 100 Shares. Position size is $5,000 Capital Tied up is $250.00 at 5% margin.

Buy Stock D at $25.00. 5% Margin Requirement. Stop Loss at $23.00. Buy 200 Shares. Position size is $5,000 Capital Tied up is %250 at 5% margin.

This gives total Capital Tied up as $1180.
Total Position size is $20404. $404 more than Starting Float. Quite acceptable in my opinion.

If all shares hit their stop losses you lose 4x$400=$1600. Risk per Trade is 2% or Capital. Not a pretty picture.

If trading using FPO and all shares hit stop losses you lose $1600 plus brokerage in and out.

Unless you include the cost of brokerage into your Risk per Trade then the number of shares you buy would be less. Thereby ensuring if all Stop Losses are hit you lose $1600.

Depending on what Exit Strategy you use, if you use a trailing Stop Strategy, once the trailing stops move into a position where you will exit in a profit, then this can be your trigger to open another position.

For example:

If Stock A has a trailing Stop that is always $2 below current Market Price. If Stock A price reaches $38.00 then you are currently in a no loss position or break even. Because if the stock drops by $2.00 then you sell and break even or small loss after daily interest taken into account. Sell at $36.00 your entry price.

Once a position reaches a profitable price using your Trailing Stops then openning a new position allows potential for greater profits because you are using leverage to open more positions, but reducing risk because Stock A is currently above Profitable Stop Loss.

Obviously you are exposing yourself to greater risk because you now have a greater position size than your current Float. However this is the beauty of using a Leveraged Product if used properly.

Gapping can hurt you if Stocks gap past your Stop Loss Price. This is an important thing to remember. The more Positions you have the more you are putting yourself at the risk of experiencing Gapping or worse Slippage.

This is the downside of CFD’s and leveraging yourself above your current Total Float size. < ===== Very Important.

Hope I haven't made a mistake in my calculations, hope this helps you understand CFD's a bit better and how to use them whilst managing risk.

Cheers


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