Diary of a CFD Trader

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Having read Shareworlds short article on contracts for difference (CFDs) I decided to open an account with City Index, one of the many CFD providers and have started a diary where I can share my trading experiences and hopefully impart some hints and tips along the way.

15.10.2006

Opening an account

The process of opening an account with City Index was fairly simple, although it was necessary to visit their London office to confirm my ID.

Due to my miniscule income, I was only allowed a limited risk account rather than the full blown version. As I will explain later this account is exactly that, limited.

The paperwork having been completed the next step was to find a share that I thought might move up or down with enough movement in the short term to make a profit after expenses.

With the limited risk account there is only a small number of shares that you are allowed to trade. As a rough guide these are shares in the FTSE-100.

As you can imagine this is very restricting.

My first trade

At this time I was watching the shares of the UK steelmaker, Corus and thought that this might make an ideal candidate for my first CFD trade.

Margin

Dealing in CFDs requires a cash margin to be deposited with the provider. In the case of City Index this margin is 10% of the value of the purchase. I had decided to buy 500 Corus shares to the value of about £2340. The balance of 90% will be lent to me by City Index (see charges here).

The reason for this number is that I figured on a price movement of around 40p to give a profit of £200 which I considered would be worthwhile or a loss of £200 which would not be too damaging.

Depositing funds for the margin was very simple. I transferred £250 by debit card and it was immediately cleared by City Index.

With a few clicks of the mouse I had purchased 500 Corus at 468p. The purchase showed up in the account window together with a real-time profit and loss calculation.

After an initial small rise in the share price it almost immediately began to plummet. The share price plunged to 463.66p where, unfortunately the stop-loss came into operation and I was sold out at this price, giving me a loss of £76 (The feature is designed to limit the maximum loss to the trader).

Almost as quickly the share price recovered to 470p on the same day! At this point I realized I should have read the rules of the CFD game: Because I had put up the minimum margin my stop-loss was also set at the minimum of 3%.

Due to this I lost 13p per share plus two lots of £15 minimum commission.

Second trade

Being somewhat miffed about this trade but still believing there was more to come in the Tata/Corus bid situation I decided to buy back the shares which now stood at 476p.

This time I asked City Index if I could lower the stop-loss to 455p as a cash bid of this level had been agreed by Corus. I discovered this was easy to do; I simply had to increase my margin to £250.

The share price subsequently traded in the 468-480p range until 17th November when it rose sharply on an approach by CSN to 500p and then 505p.

I am currently holding the shares in the hope that more bid action will lift the share price nearer to 520p.

Joe, Crawley trader

If anyone at this stage is thinking of trading CFDs dont be afraid. Establish how much you can afford to lose and have a go as our novice trader did. You could start off with phantom trades but obviously it will be more satisfying and secondly you will be more focused if you trade for real. However, we strongly suggest you study all the rules before going live. We have detailed a list of the charges associated with a City Index CFD account, viewable here.

11.12.2006

Corus hit 529.5p today on an increased bid from Tata Steel of 500p per share and a subsequent bid of 515p per share from CSN.
I had been looking for about 530p so decided to take the profit on the first bid.

I sold the CFDs at 527p making a profit of £255 on the trade and putting our CFD account on a current profit of £87.72.

Now I have the difficult task of looking for something else to trade in!