A 9 percent jump in India’s ‘Nifty 50′ Index in the week following July’s pull-back saw part-time, twenty-something CFD trader Karthik Ganesh make over $20,000.
Having initially dabbled in options four years ago, Ganesh quickly gravitated to trading indices with IG Markets where 24-hour markets offer the flexibility to ‘trade out’ whenever he wants. Choosing to trade more liquid indices in Europe, Australia, Hong Kong and India, Ganesh uses indicators derived from his home-grown weekly Excel journal entries and has around five positions – all long – open at any time.
During the market downturn last year, he was able to ‘short’ the market and capitalise on higher volatility to maximise returns.
Adding significantly to his returns is a strategy of compounding weekly to the long-side. Adopted eight months ago, this strategy allows his profits to run, until he literally gets stopped-out.
Assuming positions are sized properly, he says traders can continue compounding on the way up and reduce the size of their exposure when entering a losing position.
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However, Ganesh has learnt the hard way that not all weeks are profitable when trading international indices with CFDs. Over eagerness to get back into the market after his stop-losses were already triggered earlier in the week cost him around $10,000 five weeks ago. In hindsight, he says he should have only gone back into the market on the following Monday. But as a result of the large decline in overseas markets on the Friday – the only night of the week Ganesh routinely trades on – he effectively doubled his losses. “The magnitude of this loss was a crude reminder that I need to constantly adjust my trading system as my experience grows,” admits Ganesh.
Given that international indices are open 24×7, can be traded in AUD, and require significantly lower margins, Harley Salt of IG Markets notes that trading international indices over CFDs are more popular than trading international shares. Just 5 percent of total CFD trades are in international shares, he says.
As a case in point, he states that it’s possible to take a position on London’s FTSE index with a minimum 3.8 percent, compared with a minimum 10 percent required on most individual shares. “A$400 will provide £2,200 worth of UK share exposure, compared with £5,600 exposure on the FTSE” says Salt.
And with most local investors preferring to trade during more sociable hours, it’s not surprising that around 75 percent of the all indices trades – accounting for a third of total CFDs traded – are ASX-based.
While the remaining 25 percent of these trades are in global indices, the most popular instruments include: US30 (Dow Jones Industrial), US500 (S&P), Japan 225 (Nikkei), the HK40 (Hang Seng) and the DAX. Salt says while those dabbling in CDFs favour the FTSE and the Dow, professional traders like the greater liquidity offered by the US500 (S&P).
Given that it’s a good proxy on all US stocks, professional trader Malcolm Huth, who trades with GFT, favours the Dow Jones, preferring to take the average of all 30 stocks than rely on a single stock going up. And to offset the greater volatility associated with this index, Huth limits his downside by buying smaller parcels, and reducing his overall exposure accordingly.
Rather than thinking in percentage terms, he says the minimum return on any index movement needed to justify a position is around $200. Taking up to 30 – usually long – positions a day, for anything from 30 minutes to a week, Huth also trades four other indices: The S&P200, FTSE 100, plus gold and oil, and has made an average $440 every day for the last 200.
Considering the attractiveness of what’s effectively unsecured finance – offered at between 1.75 and 3 percent – Tony Anderson of MF Global is surprised investors don’t trade CFDs longer than the average five to seven days. He says most investors still don’t realise the opportunities associated with ‘buying & holding’ international shares with CFDs at these rates.
And while indices may offer a more forgiving entrée into CFDs, he says investors shouldn’t overlook international shares as they become more confident traders. “Due to the attractive cost of trading, investors should view CFDs as both a ‘trading’ and a portfolio tool,” says Anderson. “Also remember, CFD firms have resource centres to educate traders every step of the way.”
When it comes to trading specific international shares, Salt says local traders like highly liquid large-caps, with BHP, Rio Tinto and some US stocks including Google and Apple being the most favoured stocks. “It’s not uncommon for people to short BHP or Rio Tinto overnight as a form of semi-hedging or use indices as a hedge against other shares,” Salt explains. “Some traders also like to ride the sentiment up or down on any stocks currently in the news.”
So what are some of the technical and fundamental factors to watch out for? In a perfect scenario, Anderson says the opportunities thrown up by the ‘ebb and flow’ of equity markets would ideally be uncovered by fundamental analysis. But with market speed, and investor impatience making for strange bedfellows, he says charting is often deployed as a back-up tool to finding the all important crossover – preferably above the 200 day moving average (MA).
By comparison, the trading tools used by Ganesh to measure the ‘velocity and magnitude of directional price movements’ include, both MAs and the Relative Strength Index (RSI). “It’s important for good risk and money management to diversify across a handful of indicators,” advises Ganesh, “It’s good to look through all the charts/indices, at different time spans: From candlestick or five minute, daily, through to weekly and monthly, and given the frequency of my trades, I use weekly charts the most.”
Unlike Ganesh, who trades solely against the charts, Huth sets an ‘alarm’, instead of arbitrarily ‘triggering out’ at certain levels. This enables him to second-guess technical analysis against key fundamentals, like company disclosures or major policy announcements from central banks before closing out or manually reducing his position.
By scanning fundamental and technical criteria simultaneously, using special software, Huth tries to identify potential market opportunities the charts alone won’t pick-up. And with ultra-low interest rates in the US and Europe – and abundant liquidity desperate to get a return – among key fundamentals driving equities, David Morrison of GFT says the key question is when the ‘stimulus effect’ will run out and what will replace it?
By comparison, short-term traders like Ganesh, who argue that markets take too long to analyze and then react to fundamentals, believe successful trading is all about identifying and then trading-off reoccurring patterns. They look to trading signals thrown-up by technical analysis, like pivot points, Fibonacci or Gann retracements to highlight areas of support and resistance. And taking into account the October 2007 highs and the March 2009 lows, most major stock indices are currently trading around significant retracement levels.
But given that patterns break down and trends can change suddenly as one set of fundamentals replace another, Morrison agrees with Ganesh that CFD trading success comes from strict money and risk management. “No matter what approach to trading they take, producing a trading plan, incorporating realistic expectations, stops and limits is vital for all traders.”
Below is an example of one indices and one international shares trade supplied by IG Markets.
Buying FSTE 100 (UK):
IG’s quote is 5222/5228
5222 to Sell & 5228 to buy.
You think the FTSE 100 is going to rally and decide to buy at 5228, the offer price. You buy two contracts (one contract is the equivalent of A$1 per index point).
To open your position you supply a deposit of A$200 per contract = A$400. You will then make or lose A$2 for every point the sell price rises or falls below 5228.
The market moves in your favour the next day & you decide to take your profit. IG’s quote is now 5313/5319 – you close your position by selling two contracts at 5319, the bid price.
Your gross profit on the trade is calculates as follows:
Opening Level 5228
Closing Level 5319
Gross profit: 91 points x 2 contracts x A$1 = A$182.
The deposit on the trade was A$400 (A$2 x 5228 = A$10,456 exposure/A$400 deposit. This works out to be 3.8% deposit.
Buying Vodafone (UK):
The stock is quoted at 126.85/126.95
126.85 to sell & 126.95 to buy
You buy 10,000 shares as a CFD at 126.95 (the offer price).
To open your position you supply a deposit of 5% or £634.75.
A week later Vodafone has risen to 135.25/135.35 in the market and you decide to take your profit. You sell 10,000 shares at 135.25 – the bid price.
Your gross profit on the trade is as follows:
Opening Level 126.95
Closing Level 135.25
Gross profit: 8.30p x 10,000 shares =£830.
This gross profit (£830) will sit in your account until you convert it back to Australian dollars (£830 x GBP/AUD exchange rate 1.7970 = A$1491.51).