Trading in Share CFDs - a fresh approach

TRUMarkets offers active trade suggestions on Aussie equity CFDs. The suggestions will be revamped to cater for the prevalent market conditions with slightly wider stop losses along with a strict dollar value risk management system for each trade suggestion, that can be used as a guide for your own trading purposes.

With market volatility still at a fairly high level, we would prefer to implement Share CFD suggestions with parameters that enable a suggestion to "run its course" without being taken out by the short term "noise". At present, this may mean we typically require initial stop loss levels that are between 4% - 6.5%, depending on the volatility of the stock and the absolute level will be determined by where the next closest technical point of support or resistance lay. However, 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, trail stop levels toward the prevailing CFD prices to protect profits or exit ahead of a target price level and these changes will be communicated to our Subscribers.

With CFD providers offering such differing levels of leverage (margin percentages) on share CFDs, we find it most appropriate to base our suggestions going forward by quoting our trade suggestions (and therefore returns) in terms of a set $ amount invested. 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.

For instance, we may have a suggestion to go Long ANZ as a Buy on Stop above $13.52 (break of the horizontal resistance) for a target of $15.50. Our technical stop level in this instance might be $12.76, which is 2 cents beneath the potential gap refill support between 10th and 11th March.

Therefore based on a $20,000 bank, we would suggest risking no more than $1,000 on the trade.

The calculation for the number of CFDs required for this suggestion is as follows: $1000/($13.53 - $12.76) = $1000/0.77 or 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.

For instance, for a slightly more risky stock, outside of the Top 20 such as JHX, if we were to suggest a trade it may be with a slightly lower exposure such as $800. We may have a trade suggestion such as Long JHX @ $3.50 (2 days above the 15-day MA line), and we choose an initial stop level of $3.31 (2/3 retracemtent 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).

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. We may suggest a Long trade @ $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.

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.

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.