CFD chat

Cobra

It sounds like your trading is based upon quite a short term style, perhaps of a few days or so?

I used to trade based upon price action between straight edge trend bands, with trades being of a few days duration.  For a variety of reasons, I modified my strategy a few months ago to 10 day/20 day EMA cross-overs, with the view of trades lasting several weeks (straight edge trends lines still form a secondary indicator in my strategy).  In both cases, however, the stop loss remains at a few percent and is triggered by price action.  For a stock that slowly drifts down (or sideways) the MA cross will trigger a "controlled" exit, but a sudden price movement will still trigger an instantaneous stop loss.  I base the stop loss on percent as from back testing I have found consistency with using  4 - 5 % (setting it tighter reduces overall return just as dramatically as loosening it up).  This provides me with a simple solution, no support line or soul serching required.

The same could be applied with placing a stop loss below a MA, as in the previous example - any sudden price movement below the MA will trigger an exit, not to be confused with waiting for the MA to drop below a certain point.

Although I trade shares direct, where the level of margin is less than with CFD's, the strategy remains the same. The tricky question is whether placing a limit of 2% of total trading capital at risk applies to 2% of base capital or 2% of capital including margin.

Initially my thoughts were that it should be based upon total buying power, but I may have been wrong here, consider this example:

Lets say a person has $100,000 in the bank to trade with, and 5 trades in a row hit the stop loss, then the damage will be:

1st trade - 2% of $100,000 = $2000 loss

2nd trade - 2% of $98,000 = $1960 loss

3rd trade - 2% of $96,040 = $1920 loss

4th trade - 2% of $94,120 = $1882 loss

5th trade - 2% of $92,238 = $1844 loss

Adding to a total loss of $9606, leaving the trader with $90,394 to continue trading.

Another trader has $10,000 and trades on 10% margin, so the total buying power is $100,000.  Thus, 5 losses in a row will again lead to $9606 loss. In this case though, the trader has lost nearly all the base capital and so basically cannot continue trading.

Clearly my response a couple of days ago is flawed, is the answer then somewhere in between?

Chart Rider

Making a little sense. The hardest thing about stop losses and profit taking exits is when studying the best option you're always looking in hindsight. This makes it extremely hard to make a firm decision as to what stop you want. But I guess that is the art of trading as some say!

Will look into CFD's a little more closely and see if I can amend my system to suit.

Thanks for the responses. Keep em coming if you have anything further to add.

davkell,
Firstly, I would think a stop loss of $5.31 is too low for a margined product, and 2% is not feasible as a stop loss amount (for CFD's). I don't quite understand your calcs as above.
Is it 2% of $5000 or 2% of the trade value? Your stop loss at $5.31 is 8%. Are you talking about risk ie the amount prepared to loose from your total trade acct or setting a stop value on the individual trade?. I'll show you a typical trade I do for example.

Buy 1000 CML @ $9.50 = $9500
At 5% margin I am required to deposit or contribute $475
Now if I'm only willing to loose 2% then my stop loss would be 475 X 2% = $9.75. For 1000 shares that equates to 1c, not practical. But if  you're total loss (from $5000) amount is $100, then your stop would be 1000/100 = 10c = $9.65. Does that make sense?  Even though the loss from the trade would be 100/475 > 20%.  Basically I set a dollar value as a stop or what I'm prepared to loose. How does everyone else do it?(trade CFD's).

Cobra