School Corner – Maria’s Golden Rules for Trading CFDs

Featured in this month’s Master Investor Magazine.

Ladies and gentlemen, I do realize that we were just beginning to touch upon the subject of Deadly Trading Sins with my last few articles here in the new Master Investor Magazine, so I really hope that you will forgive me for changing the subject for the current and following issues.

This follows the Traders’ Panel Discussion with my friend and renowned market strategist Zak Mir, which took place during last month’s 2015 Master Investor Show.

We shall continue our trip down the Sins lane in July (and mind you, I am no saint, I just know how to keep my ‘sins’ out of my Trading, and hopefully one day you will too). So for now, let’s just look at my Golden Rules for Trading CFDs…

Rule 1 – Avoid Overleveraging

Do NOT overleverage your accounts, ladies and gents. CFDs are one of the most flexible financial products ever invented, but they are also one of the riskiest. If you do not know how to play with fire, then just don’t. If you do not trust yourself, but trust someone else enough, hire them to help you. If you do not know such a person, stay away. And finally… if you think you are better than the professionals, then good luck, prove it, and I shall give you my own money, seriously.

So what do I mean by overleveraging? Let’s start with the assumption that all the funds in your trading account are funds that you can afford to lose (and if not, then too bad, they shouldn’t have been there in the first place), so the maximum of these funds that should ever be used for the total of your open positions is 80% at any given time. And this IS the maximum. The rest (at least 20% at any given time) should just sit there in cash. You are NOT God, and as such cannot predict Lehman Brothers, MF Global, a plane crashing into the Tower of London, the End of the World as we know it etc. You just have to accept that, remote as the probability of such an event may appear to be, it is definitely not zero. I have. I guess watching Lehman Brothers fail and having my money tied up in MF’s liquidation helped to open up my doors of perception. So, coming back to you and to today, if a similarly shocking ‘Black Swan’ event should happen, you want that minimum 20% of remaining capital discussed to get you through the subsequent rainy days.

Rule 2 –Position Sizing

We discussed this one in one of my recent articles, and as I believe I have repeatedly mentioned before, in the markets size DOES matter. In short, “too big can kill you every time”, and too small is just not worth your while. What is more, by some weird coincidence, you will find that you will always tend to lose money in the trades you went “too big” with, and win money in the trades you went “too small” with. So how about you just try to determine a suitable position size for each of your trades given the size of your trading account and risk tolerance, and adhere to it?

Rule 3 – Selecting Suitable Stop Loss Orders

Let me start by saying that I do not personally use stops when trading ‘normal’ stocks. I also did not use stops when I used to trade Futures intraday for myself and institutional clients. In both cases, the reason was the same. I could control the risk I was taking and exit the position when necessary. Stocks are not leveraged, therefore for any liquid stock, the risk that you are “carrying” by buying it is 95% and below the risk that you have by “carrying” the same monetary amount in a CFD position. Yes, you could bring the size down so that you have the same exposure, but let’s be honest, this is not why CFDs were invented – i.e. they were invented to provide short-term leveraged exposure/profits to those that can achieve them. So if you are to ever receive the benefits of this, you have to learn to control the downside.

As for the Futures I used to trade, our way of trading at the time involved around 70 scalping trades per day; we had to be ‘’married’’ to our trading screens, and react like an algorithm. These days are gone as any prop trader of that era will tell you, and such tasks are now best performed by real algorithms.

So that leaves us with the present, and with the fact that when trading CFDs, it is best to use trading stops. And as I discussed in one of my past articles, these stops should be placed at the price points where the market “proves you wrong”. For example, when you are long a stock CFD, this stop price is below the support level you bought it against.

Rule 4 – Be Flexible

Nobody likes being wrong. It hurts, and it always comes at a price. However, confident people are not afraid to be wrong. So when they make a decision, they are 1) ready to fully support it without doubting it for no reason; and 2) happy to admit that this decision was either always wrong, or is no longer right if the conditions that led to it happen to change.

Let me give you an example. A couple of months ago, I was short Fresnillo and was making money in the trade. Then, one evening, a US Fed announcement came out stating that interest rates may be raised earlier than expected. Following this, Gold shot up. For me that meant that Fresnillo (being a FTSE 100 Gold and Silver Miner) was also going to shoot up soon as the UK stock market opened next morning. So I went to the office that morning, and advised all of our traders and clients to exit their related positions. Did we lose money in this? In some cases we did, yes. We for sure lost the profits we were making beforehand. But so what? The reason for being in this trade was no longer there, we were no longer right, so our only reasonable option was to exit. And that was OK. I can assure you that taking the loss at that point made no big negative difference to anyone’s weekly, let alone monthly P&L. I can also assure you that staying short Fresnillo after this point would have.

This concludes the first four of my Golden Rules for Trading CFDs. We shall continue with the remaining six in Master Investor’s June edition.

Until next month,

Happy trading everyone!

Maria Psarra is a Senior Derivatives and Equities Trader who has headed several Advisory Trading desks in the City over the course of her career. In her most recent role as Head of Trading at Prime Wealth Group, Maria determined the company’s trading strategy, supervised a team of experienced brokers, and advised high-net-worth individuals on suitable investment strategies. Maria employs different investment styles in order to construct personalised portfolios best suited to the risk and return preferences of her clients. Typical portfolios primarily comprise UK and European equities and equity indices, and, to a lesser extent, commodities and fixed income exposure.

Maria appears on Tip TV on a weekly basis providing investment tips and market commentary, writes for a number of financial publications, and is often invited to present her views during conferences such as the Master Investor Show, the London Trading Show, and Inside ETFs Europe, Europe’s largest ETFs conference.