Why you're losing 50% of the opportunities when trading
Published On: 3 March 2017 | 4:00 PM
The Singapore Market was about to open in half an hour when the phone rang.
“Good morning, Phillip CFD Department. How may I assist you?”
Mr. Tan was on the line, asking for advice on what he should do with his DBS stock holdings. I opened up the chart of DBS on our POEMS 2.0 platform and saw the following:
Mr. Tan explained that he had positioned himself in the stocks of DBS back in 2012 after attending our POEMS Market Outlook Seminar. The price was about S$6.10 higher than what it was when he bought it in 2012. Now, he’s wondering what he should do. Take profit, wait for it to come down and then re-enter or continue to hold the position as there may be further upside?
What would you have done?
None of the answers above are WRONG! But being Your Partner in Finance, it is my duty to inform Mr. Tan on all the options available that he could take on at that time, which includes,
- Sell his holdings and reap the profits.
- From a technical point, DBS has constantly been making higher highs and higher lows, a very strong sign of bullishness and it presents itself having a further upside. He could rely on the current support at S$19.81 and if it breaks below, he can sell it.
- He could hedge his position using a product called Contract for Difference (CFDs).
Let us delve a little deeper into the 3rd option. Many people out there bears a negative stigma against Contract for Difference. There is a common perception lingering around that because CFD is a leveraged product, it is risky and hence, not a good investment vehicle. To add on to all these, CFD involves Finance Charge if you hold on to your positions overnight! And because of all these reasons, let us stay away from it.
To be fair, the term “risky” is often misused by people who do not understand the nature of a product. Remember what Warren Buffett said about risk comes from not knowing what you’re doing? Don’t be intimidated by something that you are unfamiliar with.
So why are many investors losing 50% of the opportunities in the market?
Simple, many of us invest when markets are rising. When it is going the other way, we sit back, hold on to our losses or cut our positions and wait till it is rising again.
Well, if you are doing this, you are losing out 50% of the opportunities. This is not what professional traders do!
GIF Source: GIPHY
What are CFDs?
To put it across simply, CFD is just a contract between you and the broker where you settle the difference between the opening and closing price of the contract. It allows you to go Long or Short.
I have attached a video at the end of this article to fully explain it.
- Opening & Closing Commission
- Finance Charges
Why trade CFDs?
In times of uncertainty, CFDs allow you to establish a full or partial hedge on your portfolio.
Let’s go back to Mr. Tan. I spent a great deal of time talking to Mr. Tan that day, clearing his doubts about CFD. I did the necessary calculations for him and gave him a strategy to consider. Do a full hedge, by short selling the exact amount of DBS shares that he owns in his stock account.
He would hold this short position until 1 of 3 things happen,
- The resistance level of DBS was at S$21.40. If the price of DBS breaks the resistance level with high volume, he will close off the short position and continue to ride the trend upward in his stock account.
- The support level of DBS was S$19.81. If the price of DBS breaks S$19.81 with high volume, he will close off the long position and ride the downward trend in his CFD account.
- If none of the above 2 happens in the next 2 months, he will close off both positions.
Eventually, he agreed to try out the strategy. At this point, there will be no changes to Mr. Tan’s Profit and Loss (PnL). Due to identical positions in the opposite directions, a gain in price would increase his stocks PnL but decrease his CFD PnL and vice versa. He would only be incurring the additional finance charge on a daily basis.
Guess what, DBS broke S$19.81 with high volume.
Mr. Tan sold the stock holdings and held on to the short position in his CFD account. The rest was history. He closed and opened a few more short trades after that and managed to ride the trend all the way down to S$14.50 (DBS hit a low of S$13.01). He made almost 75% of the amount he did when the price went up, all in just 7 months. You see, by trading both ways, Mr. Tan doubled his opportunities and almost doubled his profits.
To conclude, CFDs are by no means a sure win product. However, it is very important for you as an investor to understand all facets of trading. It can complement your investments and help make better investment decisions. And if you are unsure of what to do, we are always here to help you.
Here’s the video:
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