Diary of a CFD trader: 5 days in the life

Or: how I went short in a rampant bull market and survived (just!)

Back in April/May 2006 I felt the rally was becoming overdone. I originally began shorting the market using index warrants with some success but then constant Weekend AFR Smart Money articles convinced me to open a CFD account and try using contracts over the ASX 200 instead. It was to be my first experience with the now ubiquitous CFD and I was spurred on by frustration with the market maker’s warrant pricing.

I felt that the index would return to around 5000-5100 so my strategy was to short the index after rallies. As I was betting against the trend one of my risk management exercises was a rule that I had to be square at the end of each day. I wasn’t prepared to risk being short overnight and have the market move 60-80 points against me.

So, without further ado, here are my notes from five different days of trading CFDs:


Day 1: Friday

The market fell sharply the previous day (1.6%) so I figured I could sell into a recovery rally. The open was strong, wiping out almost all of the prior days losses. I figured it wouldn’t hold and sure enough, shortly after opening fell back. Opened my position at 42.5 and fifty minutes later I’m closed out at 26.0. Great way to start, I'm stoked.

Later in the morning we get another small rally, so I try again this time opening up at 35.0 but get stopped out ten points higher. Finish the day mildly square, up six points, but what fun!


Day 2: Tuesday

Dead keen to get into the action again, the market opens and quickly unwinds the 1.2% rally of the previous day. Using my highly tuned instincts (with a full one day’s CFD trading under my belt) I decide that 31.0 looks like a good spot to open another short position. The market trades in a tight range and I’m out of the money for most of the day. As we get near to close it finally drops off and I buy my contracts back at 16.0 finishing up 15 points. Two from three!


Day 3: Friday

Tight trading ranges since Tuesday haven’t offered many opportunities but big falls offshore overnight suggest today could be a good one. I use a fairly tame opening to get set at 19.0 and then add to my position at 18.0 – three days into this adventure and the confidence levels are sky high – before watching it move sharply against me: my stops were triggered on the first position but I let the second run – big mistake – and wind up down 11.5 points on the first and 21.5 points on the second. Ouch, there are a few naughty words sprayed around. Later in the day as the late morning rally runs out of steam I try again and sell more contracts at 27.0 and then towards close sell more at 7.5. The market closes, stops are in place and I’m watching the overnight session to try and get out square. It’s getting late but I really really want to make that money back. It’s not until 11pm I finally give in and close both at 3.5. I’m down just six points for the day. Phew, big relief after a nasty start to the morning and I feel like I’ve done well as we go into the weekend.


Day 4: Monday

It’s all one way traffic today. Big falls on Friday night as major markets lose more than 1.5%. I get in as quick as I can and sell at 37.5 but too late, the market has already bottomed and the best I can do is make just 6.5 points for the day. It’s a golden opportunity squandered because the market’s finished nearly 100 points under the level at which I closed out my positions on Friday: damn it, should have stayed up later last week (more coffee!) or just left them alone entirely! More creative swearing ensued, big profit opportunity missed. In fact, I missed out on profiting from the entire reason I’ve been trading the damn things!


Day 5: Wednesday

Throwing strategy and plans totally out the window I go long expecting a “dead cat bounce” and I’m set at 22.0. The market hovers, falls scarily close to my stop before recovering and looking good. I buy more at 22.0 as it goes through and ride it for the rest of the morning. Just before lunch I call stumps and sell at 42.0. The market has moved as high as 50.0 before falling back. It’s looking a lot weaker now with selling increasing so I take my profits and run. A good day out, made 20 points on each position and I debate reversing and going short but decide it should hold its ground. Alas, wrong again, the market promptly plummets in the afternoon and finishes at 17.5.


Epilogue:

Not long after the fifth day the market closed at 5100 so it was back down to where I expected it to be. I packed up my toys and went home, putting the CFD capital and gains into something less exciting. However as history shows the market then went on to fall even further, getting down to 4838 by mid-June so I should have stayed in there but of course the index has put on over 1000 points since then so I guess I can’t really complain one way or the other.

Ultimately I made twice the money from my warrant trading than CFDs for about half the effort but on recollection (gotta love the rose coloured specs) I think I enjoyed the CFDs a whole lot more.

I learned a lot from this little exercise but it’s particularly interesting how my trading rules (e.g. squaring up at the end of each day) worked against me in some ways and actually stopped me from getting the really big profits that my strategy would have delivered if I’d stayed with warrants. I guess because it was a new instrument to me that I was a bit more cautious than usual, plus the fact that the leverage on these things is huge. And on the flip side the rule probably protected me from some of the big upward moves overnight. Next time I think I should be prepared to take on more risk.