Winning, CFDs, and AlphaReveal

Trading and gambling share many aspects in common. Both activities involve taking risk and unknown outcome. However, there are distinct differences that differentiate trading from gambling. Understanding the differences is key for winning trading. With traditional gambling aka Casino-style games, the player doesn't have an advantage. As such, statistically the more you play the more you are likely to lose therefore it is important to minimize the amount that you play in order to minimize the amount that you are likely to lose. However, if you have an advantage, the ability to read the market, then you are playing a different sort of game. The key to winning "winning games" is to be able to stay in the game. You don't want a statistical anomaly, aka one bad trade or one bad day or one bad week to take you out of the game. So, you need to employ what is known as risk management.

More over, you need to capitalize on all the key differences that differentiate trading from gambling. One of the key differences is the ability to bet more when you are more confident (or more likely to win). The greatest skill a trader can have is the ability to recognize the probability that they are "right" or "wrong". Said in another way, confidence for great traders is highly correlated with the probability that they are right. True, it is very possible for the skilled trader  to be flat out wrong when 100% confident, and the risk management is still important to mitigate those times.

Clearly the trader needs to be able to vary the bet size while staying within reasonable risk limits. Leverage, the ability to control a large amount of capital with a small amount, is often confused with trading big size. In fact, the ability to leverage says nothing about how leveraged an account need be. Active traders absolutely require leverage. However, futures contracts tend to have low granularity: that is each contract represents a large notional amount. The leverage is only available in big chunks and that's a serious problem for many small traders. The optimal trading instrument for small traders is one that offers high leverage, high granularity, and high efficiency (tight/competitive spreads and low costs). Futures have high leverage, low granularity, and, generally, high efficiency. Retail stock accounts offer low leverage, high granularity, and high efficiency.  Obviously, neither of these match our ideal candidate. 

CFD's or what are known as "Contracts For Difference" offer that unique combination of offering high leverage, high granularity, and high efficiency that make them really appealing instruments for active traders especially those with smaller accounts. CFD's allow traders to leverage to very high levels but to get into the market with small positions on. This is a powerful, powerful tactical advantage for the trader who has access to such products. Unfortunately, for U.S. traders CFD's are unfortunately not an option (some rare types of exceptions may apply) and small U.S. based traders are significantly disadvantaged because of that and hopefully that will change. But, for traders overseas, these CFD products offer really incredible tactical advantages over futures. You can add to your best trades while staying within the risk limits. For example, you could put on a small feeler position at $20 per point or less then one-half the size of the standard ES emini futures contract and based on your read of the market and confidence you could add size up to what could be the equivalent of several futures contracts. This can be a very effective way to trade but one that is not an option for futures traders unless they have larger accounts.

Additionally, you can right size leverage for your trade whether it's a day trade, scalp, or swing trade. This is a really significant advantage for the trader who takes advantage of it. For example, let's say that you need to place a trade that requires a 20 point or $1,000 stop loss in the ES. You've also determined that you need to keep risk below 3.5% and you are trading a 15k account. The risk limit states you should limit your loss to $525 but your trade calls for $1,000 stop loss. You must either skip the trade, exceed the risk limit, or use a non optimal stop loss. None of these are good options. If you were trading with an S&P 500 index CFD, you'd simply position size at $26 per point.

And, the best part is that you can read the underlying futures market using our incredible AlphaReveal software while placing your trades in the CFD market! Some traders feel that it is also more possible to scalp CFD markets because some brokers offer fixed spread (others offer direct market capability). Generally, a problem with DMA brokers is that they may not be able to quote the market at all times when they can't hedge while market-maker style brokers may be able to offer more consistent quotes but higher fixed costs (and, of course, potential for conflict of interest). We are not an expert on this matter as to which style broker is best. While, again it is very disappointing, and hopefully temporary, that these capabilities are not available to U.S. traders, we highly encourage our traders outside the U.S. to try out the CFD market. 

Finally, if you trade both CFD's and futures then please share your thoughts in the comments section and we'll post them. Do you feel CFD's are better or worse for scalping? What do you feel are the advantages and disadvantages of CFD's compared to futures?

Wednesday, October 29, 2014 7:35:00 PM


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Risk Disclosure:

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure:

Hypothetical performance results have many inherent limitations, some of which are described below. no representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.