My CFD experiment failure
CFD trading: an honest account of my experiences with CFD trading and what I have learnt from the whole process and what others should know before they embark on such forms of investing.
I'm going to reveal one of my biggest financial failures to date. What I am about to reveal is a true account of how I made my first significant financial loss through stupidity and greed. I share with you hear because I originally set up this blog so that I would be honest and accountable for my financial transactions so that others may learn from my mistakes and successes, equally.
I'm going to reveal one of my biggest financial failures to date. What I am about to reveal is a true account of how I made my first significant financial loss through stupidity and greed. I share with you hear because I originally set up this blog so that I would be honest and accountable for my financial transactions so that others may learn from my mistakes and successes, equally.
The Beginning of my CFD Experiment Failure
The instrument of my downfall was CFD trading, or Contract for Difference trading. I will delve deeper in to what exactly are CFDs in an upcoming post in the next month or two in series on Financial Products (so watch out for it!). I will try to give a decent explaination here of what CFD trading is. I say 'decent' because if I am truly honest with myself I cannot real off an explanation just like that (I need to use my notes and the internet) which just goes to show how stupid I was to invest. This in turn leads me to my first lesson:Lesson 1: Don't invest in something that you don't fully understand
How do you decide if you fully understand it? Well you should be able to explain to someone (with no knowledge of the product) exactly why you are making the transaction, and I still cannot do this! Anyway, here goes my attempt (with a little help from Wikipedia):
CFDs are financial contracts between two economic agents (could be companies or people) that state that the seller will pay a difference between the current value of a particular asset (bond prices, share prices, foreign exchange prices) and its value at the time specified within the contract. If this difference is negative then the buyer pays instead tot he seller. So far so good? It all seems simple enough:
- Find a company share price that I had been following for a while
- Predict its future month share price
- Open a CFD contract to say that the value would go up
- Have enough money in the account for short term falls
- Make a couple hundred quid in a few weeks without much risk or effort
The CFD Transaction
I really like the company Weir Group and have actually held it in my stock portfolio before. In the past it has rose to over 2000 pence. From my value investing I made a nice profit on the share (about 20% in 6 months) and sold the shares to buy into Lonhro. This was back in January and in the meantime Weir Group share price has been hit by the current Eurozone debt crisis falling to 1765 pence. I thought this would be a great time to open up a contract predicting that the share price would hit 2000 again. I reminded myself that I should be greedy when the market was afraid and fearful when the market was greedy and proceeded to make the transaction.
In April 2012 I transferred £450 into a CFD trading account and set my limits so that I'd stand to make about £225 if the share price hit 1995. I also set limits to act as a precaution. I set a lower limit of 1365 so that I could lose almost £400 before the system would automatically close my trade. The share price had not been this low in over a year and I couldn't for the life of my consider that it would do so here.
The Second Big CFD Mistake
The second stupid mistake (after not fully understanding CFDs) was the fact that I did not fully read the small-print of the CFD transaction. This may have been because I was in so much of a rush to complete the transaction before the share prices rocketed back up again. As a result I did not realise that I would be charged £30 straight away for the privilege of risking my own money. Nor did I realise that I would be charge of about 15 pence every day that the contract was open.
Lesson 2: Make sure that you know what all the costs are
The CFD results
The share price went up a little to about 1800 before plummeting down to 1350 in less than two months. As I watched I constantly told myself to be patient and that the price would rise back up soon. I lost all my capital and at the end of the transaction withdrew £5.11 for all my stress and troubles. The great irony is that the contract was ended on 14/06/2012 by the 'stop' that I had put in place and yet the very next day the share price shot up 5% in response to some good banking news. Such is life.
Oddly enough I am not too upset by it all. In fact I am quite relieved that the whole ordeal is over. I did not enjoy the uncertainty of the whole process one bit. I really would never do it again. For someone like myself who really does not know enough about this financial product it really is like gambling. In future I intend to stick to investing in shares for the very long term.
Readers, do you have any similar investing horror stories that you berate yourselves still to this very day? What have you learnt from your experiences?
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I've come across some advice on CFDs saying to never leave the position open over weekends or public holidays, and to try only hold a position for between 1 and 5 days.
ReplyDeleteIn hindsight, would you say this advice is accurate?
I do know a great deal about this subject, having traded as a non-institutional trader for 15 years, most of which was in CFDs. 'Bottom line'is that most companies trade against you, that's why they have so many $100k p/a staff.
ReplyDeleteThey win/you lose, or like myself I fought them for years, having never lost in a given month, but making much less than a wage throughout this time.
I can give volumes of details, but just know, when you begin to win off them, they monitor your every move, and have the advantage.
ADVICE! Get a job, start a business, restore cars, anything but dont bother with the crooked snakes at the bottom (ethically) of this industry.
Honest companies startup, and are soon after bought out by the crooked ones, so really, do something else, unless you are genuinely sadistic and self defeatist.
Lloyd
I lost $2400 in one night on gold leveraged up $1000 to a $500,000 position short. Then I logged in a week later and lost another $400 trading FOREX. Such is life!
ReplyDeleteIt happens! But we all learn our lesson...I hope!
ReplyDeleteSo it would seem that you are suggesting that if you are going to get involved in CFDs or Spreadbetting then you should have sufficient capital. Whilst that may be true I am not comfortable with the level of risk that CFD trading would involve. I still view it as a source of gambling. How can you know that in the short run that a particular stock or index will go up or down. I think I'll stick to investing for the long run. That way I can manage my risk better through portfolio management and searching for value that should reveal itself in the longrun.
ReplyDeleteMoneybank, it appears that now you are trying to defend your opinion. I do not dispute that it is a form of gambling but frankly most of the things in life are a form of gambling, e.g u take a mortgage on a home on the basis of a permanent job, well most of the so called jobs in the UK are not permanent after all, with a clause to make u jobless with a two month notice, even the soldiers fighting in foreign countries are not immune from this. Further no one can predict the market, not even the big gurus in this field, they only hav an opinion based on years of watching and assessing the markets. its all experience and learning, just like it takes years to become a specialist doctor or a lawyer or even a stock broker. i am clearly not defending this form of earning as i am myself not 100% confident, but i do believe that most of the economies are running on the basis of the stock market and there are people involved n possibly making money. if not then it would hav collapsed ages ago.............long run or short run, if u do not understand the market or if you blindly hav faith on a management company, u r surely gambling
ReplyDeleteI will agree and probably put a blind bet if someone no matter how experienced he is, could predict any market going up or down. its practically impossible because of the millions of investors involved with probably everone of them having a different view of the market. I cannot say of those who are lucky, because surely i hav not been, and whatever i have learned is through sheer hardwork, keeping records, spending considerable amount of time, both day and night and keeping tab of everything and anything, but believe me i still consider myself to be a naive. I am not sure if there are many people who are making money simply on the basis of luck, because then most of us would have been winning the national or euromillions lottery and the providers of the lottery would have gone bankrupt ages ago and this is certainly not the case. Going bk to my example last time, i entered 6 trades in the last 3 months with guaranteed stops in place (mind u after 3.5 yrs of struggle) and out of them 3 were stopped out at a loss of 50 points. on 1 i did not make any profit or loss. Out of the rest 2, 1 made me 49 points profit and the other is still trending at 600 points profit. Its just a reflection of what might go right after all this hard work and you really do not need to be right 50% of the time to stay in the market. Having said all, i am still positive as i have a diff source of income but would like to live a traders life if possible at all....
ReplyDeleteI've been trading via IG Markets for last 18 months.I trade Ftse 100 cash. Wall St. Aussie 200 cash Micro. So I can start at 7.0am and trade continuesly through the whole day right till mid night as the markets open and close right around the world. Sometimes I wait weeks/ months until the markets have peaked at all time highs. Then you know they can do nothing except go down. And you go short for weeks as they go down.
ReplyDeleteOther times right on opening time I purchase say 5 units in each direction then put in a sell orders 20 points above and below. Later in the day as the market moves up and down, my orders are triggered and I make profits from both directions.
Sometimes right on opening time I place orders both long and short say 50 points above and below the opening price. And I place closing out orders say 75 points away on both at the same time. And usually during the days girations I make money.
Another thing to watch is that sometimes Wall st rocket up like a skyrocket, 100's points in a minute. I quickly place a large order when I think its peaked. then in the next minute as it returns to ground level I make money.
Another way which is called 1, 2, 4. You wait until you think its ready to go down and You go short one unit. But if it goes up (against yr hopes) after 50 points you go short 2 units, and if it still goes against you another 50 points you go short 4 units.
By then usually it must turn down and you sell the 4 units for profit and sale of the other 3 units are all extra profit,
Also usually first thing on a Monday morning the Aussie goes up, up!!
And on about 1 out of 3 Friday evenings the Ftse crashes and if yr ready waiting you can make big monies.
Start really small and careful ($1 units will only outlay $25 of margin). Only risk about 2% of yr kitty on each purchase.
To be really safe only trade shorts all the time and hardly any longs. Because can drop big time suddenly and really catch you out. Where as it hardly ever goes up suddenly in a really big way.
In closing. IG's working platform is amazing. I really love it compared to all the others I've tried.
I traded Forex CFD's on a live demo account for just over 6 months, so i had 20K to play with, even after sifting through hundreds of different trading patterns and styles and trying them out and making quite a lot of different trades you know how much i had left after 6 months? £19,854.21 my lowest point was at around £14,000.00 so i pretty much just made most of my money back and decided that unless i have a spare 100k lying around that i don't need then this really isn't a game someone with small pockets should be playing. I Believe that if i had used real money chances are i would have lost it, however, what i will say is i find it a bit more exciting that your standard forms of gambling like roulette, black jack or sports betting. So next time i have a £50 note i don't know what to do with i might stick it on for a punt. The problem i feel with CFD's is that they are really addictive and you have to get past the gambling mentality of, oh just one more, or damn i'm losing so much, lets take bigger risks, and all the while when you're in that state of mind your decision making is very poor. I think the attitude should be, i've got some spare cash i'm gonna go in, place my trades and get out when the going is good, rather than sticking around all day losing money
ReplyDelete