Thanks Padhai,
At the risk of being moderated for writing another epic, I'll try to contain myself - although it won't be easy... I should start a blog instead!
I still like trading 'Contracts For Difference' because of the leverage available and being able to easily short stocks (no doubt much to the disdain of most of you guys on here). For those of you unfamiliar with this derivative trading instrument, just $5000 on an ASX50 stock, for example, like BHP, ANZ, FMG, etc, exposes you to $100,000 worth of shares; $12,500 allows you to trade the equivalent of $250,000!!! That's a quarter of a mil for a 'down payment' of a bit over ten grand! But you don't physically own the shares; you're just trading the price difference from where you open your trade to where you get out.
However, unless you are very disciplined and adhere to your risk management strategies with regard to position size, stop losses, etc, and have a pretty decent trading plan (and learn how to read candlestick charts), you can easily come undone. I was at my peak just as the GFC was rearing its ugly head in 2008. I actually shorted Lehmann Bros and Bear Sterns just as they were coming apart, and made a bit of a killing off that. But I sort of feel a bit guilty for all that looking back. I mean, of course
I didn't cause the demise of those establishments, but like all shorters, you're just in it for the money and you don't care what happens to the actual company, because even if you're long you still don't really have any vested interest or emotional attachment to them (and it's way quicker to ride a falling price than a rising one, most of the time). Another one was Billabong (BBG), which I decided to hold short for a while and somehow managed to enter right at the top just as it turned and got out exactly at the bottom a few months later - that's pretty rare!
That's where being familiar with technical analysis and reading charts really comes into play. You'd be lost trying to trade CFDs if you didn't use charts. Most of the time Fundamental Analysis doesn't matter at all, because you're just concerned with the share price itself, not the day to day workings of the company, unless a mining company just struck gold or whatever. I mean, who cares who the CEO is, unless he's just been sentenced to prison or something! That's how it was for me at least. I was day trading. There are probably people who use CFDs for long term investing (although there are fees for holding open long positions for more than a day -
you get paid if you hold a short position overnight though), and therefore it'd no doubt help to have some idea of what the company does and what their balance sheet looks like, etc. You also get paid the equivalent of dividends too, but if you're short you have to pay that same equivalent - don't be holding an open short position when a company goes ex-dividend! I learnt that the hard way.... But I basically just traded off news. If something was on Bloomberg or CNBC about an Aussie ASX company, I'd pay attention and use that to my advantage.
But going back to what I was saying about trading on margin, less liquid or well-established stocks require a higher percentage of margin. Some stocks - especially these sort of speculative mining stocks - require a minimum of 25% IM (initial margin) and you can't short them (Phew! I hear you all say...) Well, at least not through IG Markets or City Index at least, which are the platforms I use. Actually, with City Index, many of those stocks require 75% IM and some even need 100% IM, which sort of defeats the purpose of trading CFDs. You may as well just buy the actual shares! With IG, those types are just closed to CFD trading altogether.
Actually, after reading Jason Stevenson's report, I was initially going to trade Mt Ridley Mines as a CFD, thinking I could perhaps have exposure to $40,000 worth of stock for just a 25% initial margin requirement (IMR) of $10,000, but I found it couldn't be leveraged with IG and wasn't even available through City Index. IG's platform comprises both a CFD and share trading platform - two-in-one - so I switched over to the share trading component just to see if MRD was there, and it was.
It was only because I was so impressed with Jason's review and confidential 'forecast' that I decided then and there to actually buy
real shares and not use any leverage at all. Wow, using all my own money... What a trip!
So that's how I came to be a bona fide Mt Ridley Mines shareholder. Because of Jason Stevenson's report and because I simply couldn't trade it as a CFD! And I wouldn't mind betting there are many others just like me who, if they subscribe to Resource Speculator at least, are in the same boat... Just had to be in it no matter what, you know?
Geez.... Having said all this, as MC Camma said, I really hope they hit the mother lode too!
Oh well, gotta be in it to win it, as they say!
Oh, and by the way, yes.... I LOST a huge amount one day trading CFDs, purely through greed. There was a favourable news report about NAB one evening, and I thought, 'I've gotta get in on that', so that night I placed a buy stop just a couple of cents above the high of that day, hoping to get stopped in the next morning. I also leveraged myself to the hilt. From memory I was exposed to around $1, 200, 000 worth of shares (about 48, 500 at that time) for an IMR of $60,000. I had my stop-loss set, although I probably should have paid for a GSL (Guaranteed Stop Loss), and when the market opened the next morning it didn't even gap up and just stopped me in immediately.... Then it shot up! It was in March, 2008, and as far as I can recall ('cause I'll never forget) it started around $24.75 and got to a high of just over $26.00. I could see it wasn't going to keep going up, so I closed it there for an unrealised profit of about $60,600. Just before closing the position, I remember the platform equity 'metre' reading $1,260,600! Scary stuff!!!
"But John, you said you LOST a huge amount", I hear you say! Yeah, well let me finish...
After closing it, I kept watching the 5 minute chart and it turned up again, and I thought, "It's gonna keep going". So instead of following my rule of only risking 2% of my trading capital (i.e. having a stop loss with only 2% risk exposure), I was so confident that I didn't even bother with a stop loss and traded the lot again. This is where CFD trading turns into gambling... Rule #1 of trading - always use a stop-loss of SOME sort at least!
I think it was about then that I decided to go and make a coffee or something, and when I came back the price had fallen to a low of 24.60 or so - 15c BELOW my original entry! I had lost $67,900 in about 5 minutes... I know most of that was never really my own money ($60,000 or so was unrealised profit from the initial trade), but I still did lose around $8000 that I'd worked hard for and the psychological damage was done. That's another really important aspect of trading - the psychology of it all. Not long after that I started losing a lot more often, and I eventually decided to stop trading altogether and actually didn't return for many years. It was only a year or so ago that I got back into it, and I've had my ups and downs, like everyone I guess. I tried my hand at forex trading in 2015, but being naive I traded during the Non-Farm Payrolls without even knowing it was on, and yet again lost about $1500 by thinking I could manually monitor my position. I don't do that anymore...
So there you go. A nice succinct answer to a basic question...
I promise I won't post again for a while!
Cheers everyone!
(20min delay)
