One of the characteristics that lack in new traders is the actual experience of seeing trades unfold. Understanding market behavior is one of the key skills that have developed in successful traders, so a look at some specific trading examples will be useful for CFD traders new to the business. Here, we will look at various examples of all aspects of position planning, so that new traders can construct their initial trading ideas.
Money Management Example
First, we look at a protective money management trade as it relates to calculating position size:
- Using an account size of $100,000, the CFD trader follows money management rules and risks no more than 2 percent in the position.
- 2 percent risk exposure is equal to $2,000 per trade and technical analysis parameters account for a stop loss equal to 40 cents.
- Total position size is calculated: $2000 divided by 40 cents equates to 5,000 CFDs
Trailing Stops Example
In the next CFD trading example, we will look at how trailing stops are used once positions have already been established:
- The CFD trader buys Google at 395.00 with aim of taking profits on the approach of $450.00. Once the position is in positive territory, we adjust the stop loss to “trail” gains and move higher along with prices.
- Trailing stops, in this case can be based on $5.00 increments, starting from $10.00 below the initial entry. If prices move favorable, the stop loss will be raised every time prices move $5.00 higher. If the prices fall, however, the stop loss remains static and will be triggered at a loss of $10.00.
Next we look at Pairs trading strategies, which have the added benefit of reducing exposure to markets trending in one direction. When using a Pairs trading CFD strategy, traders make a forecast on the relative performance of two CFDs, rather than on the direction of the market as a whole. This adds some complexity to traditional “buy and sell” strategies and helps to reduce some of the possible risk exposure.
IBM/Microsoft: IBM has underperformed Microsoft this year by 8 percent, on better earnings reports and product sales and you forecast that this trend will continue. Strategies in the equity markets often rely on an analysis of price to earnings ratios and assuming that Microsoft is undervalued at current levels, we enter into a buy position in Microsoft and a short position in IBM. The same position size in used in each trade, as we are basic the position on relative performance.
Microsoft: Currently trades at $32.10. We divide 10,000/32.10 to calculate the number of shares (311 shares).
IBM: Currently trading at $210.45. We divide 10,000/210.45 to calculate the number of shares (47 shares).
Assume the initial forecast is accurate and Microsoft improves to $36, while IBM rises to only $214 during the same period. To calculate profits, we subtract the difference in the value of each CFD:
Microsoft: 311 * 36 = 11,196
IBM: 47 * 214 = 10,058
Total Profits: $1138
Gold and Crude Oil: Using a technical chart perspective, we have a bullish view of gold given that is has recently broken above a significant resistance level. But the same price momentum is not seen in Oil prices and this trend is expected to continue. We find two companies with commodity exposure: Highland Gold Mining (HGM) and Exxon (XOM). These will be our proxies for going long Gold and short Oil in our pairs trade.
Using a position size of $10,000 and a 5% margin, we invest $500 in each trade:
HGM -10,000/price of $139.50 = 71 Shares (buy)
XOM – 10,000/$86.20 = 116 Shares (sell)
Assuming the initial forecast is correct, HGM rallies to $146, while XOM is seen dropping to $84. Here, both trades are profitable, and we can calculate the figures:
HGM: 71 * 146 = 10,366
XOM: 116 * 84 = 9,744
Subtracting the difference from the initial investment, total profits = 254 + 366 = $622