Trading in Share CFDs - a Fresh Approach

TRUMarkets offers active Aussie share ASX CFDs. The CFD share suggestions will cater for unexpected market or individual stock volatility by applying slightly wider stop losses along with a strict dollar value risk management system for each trade suggestion. This simple methodology can be easily used as a guide for your own trading purposes.

Given the unexpected nature of share price and/or share market (spiking without prior warning), TRUMarkets prefers to implement share ASX CFD suggestions with parameters that enable a suggestion to "run its course" without being taken out by the short term "noise".

This means we typically require initial stop loss levels that are between 4% - 6.5%, depending on the volatility of the stock. The 'absolute level' will be determined by where the next closest technical point of support or resistance lay. The theoretical examples below demonstrate this best. As always, our Team of Analysts and Traders will assess trades on their own merits and may from time decide to exit early ahead of a possible stop level being hit if the prevailing market sentiment alters. Any new trailing stop levels to protect profits or exit ahead of a target price level will be communicated to our Subscribers by SMS text message and email.

Conservative Methodology:

Typically, each CFD Provider offers differing levels of leverage (margin percentages) on share CFDs. Because of this difference in leverage offered by each CFD Provider, TRUMarkets finds it most appropriate to base our suggestions by quoting our trade suggestions (and therefore returns) in terms of a set $ amount invested (The amount of money the trader invests in the trade). This provides for a more conservative methodology of accounting for trades, rather than focussing on the exorbitant leverage levels provided by some CFD providers that tempt traders to over lever their position sizes.

Theoretical Example 1:

CFD Trade - ANZ Banking Group (ANZ) March 2009: Going 'Long' (buy) ANZ as a Buy above $13.52 (break of the horizontal resistance) for a target of $15.50.

Our technical stop level in this instance would be $12.76, which is 2 cents beneath the potential gap refill support between 10th and 11th March.

Calculating the number of ANZ CFDs to  buy:

*Assuming a $20,000 bank, we would suggest risking no more than $1,000 on the trade. That is 5% of the trader's trading bank or trading capital available.

• First step: Calculate the Buy-in price minus the stop level price... $13.53 - $12.76 = $0.77
• Second step: The maximum risk is the trade amount at risk. That is the $1,000 outlay.
• $1000/0.77 = 1298 ANZ CFDs.

If the trade was exited at our stop level then our loss is $1,000 (before on-costs) no matter what the leverage provided by the CFD provider is, be it 1%, 3%, 5% or 10%.

By quoting returns based upon a prescribed dollar value exposure (as compared to a leverage ratio) it provides clarity to the performance of our trading bank. This way we can also tailor the position size and stop level according to the particular stock, as well as market conditions.

---

Theoretical Example 2: Looking at a slightly higher-risk stock:

James Hardie (JHX) - outside the top twenty ASX-listed stocks. As it carries a higher volatility and the daily traded volume is lower than ANZ's, TRUMarkets would suggest a slightly lower exposure (cash outlay) such as $800.

Theoretical trade suggestion: Long (buy) JHX @ $3.50 (2 days above the 15-day MA line) with an initial stop level of $3.31 (our reason for the stop level: it is 2/3 the retracement of the candle range of 11/03).

This gives rise to a trade size of $800/($3.50 - $3.31) or 4210 JHX CFDs so that even if our stop level is hit, the maximum loss that would occur on the trade would be $800 (before on-costs).

Theoretical Example 3: Lower-risk stock

Based on the same concept we may be bullish on BHP but as it is a more liquid stock we may consider a greater exposure such as $1,500 risk on the trade.

Theoretical trade suggestion: Long (buy) BHP @ $29.28 with an initial $1,500 position and a stop level of $27.27 (back beneath the gap refill back to 4th March).

Therefore, the number of CFDs traded would be $1,500/($29.28 - $27.27) or 746 BHP CFDs, with the maximum loss of $1,500.

Risk Reward: Everyone is different

When we provide a suggestion we shall provide a guide as to the position size in the trade suggestion itself, but this should not be construed as specific advice for your own circumstances.

We do note that individuals have differing risk/reward profiles and our trading suggestion sizes can be used as a guide. For instance if you are a more aggressive trader, you may have a $10,000 bank and trade the same position size as our guide (which is based upon a $20,000 bank), or you may be a more conservative trader and have a $50,000 trading bank and still trade the position sizes according to the guidance.

More Consistent Trading Performance:

We are of the opinion that by following such a guide on a trade-to-trade basis and quantifying your risk relative to your bank before you enter each trade, it will provide a more consistent trading performance and a smoother equity curve on your bank.

Moreover, by have defined levels of risk on each trade, it will also enable a portfolio of positions to be opened (as market conditions suit), which also provides for diversification risk.