In my previous article, I introduced Phillip MetaTrader 5 as a comprehensive trading platform featuring multiple products such as CFDs, bullions and Forex, which makes it easy for investors to consolidate their positions into one common platform.
In this article, I will explain into the detail what are CFDs and how as investors we can strategize CFDs to optimize our own capital. This illustration will be done using the Phillip MetaTrader 5 platform to showcase how CFDs can enhance your profits.
What is a Contract For Difference (CFD)?
First, we must understand what is CFD.
Contract For Difference (CFD) is leveraged tool that allows users to trade on margins and uses a small amount of capital to control a large amount of assets, thereby enhancing the potential profits one could make.
Currently, Phillip Futures offers the following types of CFDs:
- Global Indices CFD
- Commodities CFD
- Shares CFD
- Cryptocurrencies CFD
- ETFs CFD
CFD contracts have no expiry dates, which means that investors are able to keep the CFD positions open for as long as they maintain the margin requirements though the open positions are subjected to a charge called the “holding cost” which can vary throughout different products.
When you are trading in CFD, you are leveraging on your capital which means any gains and losses will be magnified.
As an investor, it is important to always keep track of the margin requirement in order to avoid a margin call. If the cash balance in your account is less than the initial margin required to maintain your positions, the firm will issue a margin call on the next business day to ask you to top up the margin shortfall. You may also close your positions in order to maintain the required capital strategically.
To illustrate an example:
The margin for 1 CFD on Dow Jones Industrial Average Index (DJI) is at 5%. When you buy 1 contract at the prevailing market price of USD33,000, the initial margin you will have to cough out is USD 1,650.
Assuming the market falls which brings the Dow Jones Index to USD30,000, the notional value of your contract is now USD 30,000. Assuming the margin requirement to maintain the contract is at USD 1,000, this means that you would have to top up USD2,350 ($1,650 – $3,000 + $1,000) in order to avoid a margin call and your positions being closed.
You can work out the different scenario in place to ensure that you have a margin of safety and buffer for your capital so your positions remain solvent.
How You Can Strategize To Optimize Your Capital
There are many ways you can use to strategize your CFD positions – these are some of my personal favorites:
1.) Martingale Strategy
The entire idea of positioning our strategies and aligning it with CFD hinges upon stretching the use of our limited capital (if you are someone with an unlimited capital, then obviously that would be different) so that we can take chances when there are opportunities in the market.
Martingale Strategy is one of the most effective strategy to implement with CFD because it allows allocating increasing amount of capital by doubling up as the market value falls and in doing so, we increase the probability of a faster turnaround or breakeven in the expectation of a future increase.
To illustrate this – Imagine having a $100,000 investment capital which you have originally intended to purchase DBS at a tranche each at $27.10, $25.1 and $23.4. This level can be anything that you think makes sense, but I have chosen in this illustration a level which coincides with the respective key level of the price to book value of the company.
Assuming you are buying this in 3 equal tranches with no leverage, you are only able to purchase 1,300 shares equally at $27.1, $25.1 and $23.4, bringing the average value of $25.2.
With CFD, you are only required with an initial margin requirement of 10% of its value. This means instead of requiring $27,100 of capital to purchase 1000 shares of DBS, you only require $2,710 to purchase 1000 shares of DBS with CFD.
In other words, you are now able to not only purchase 1,300 shares at $27.1, requiring an initial margin of only $3,523, but also double up your position to purchase 2,600 shares at the next key level of $25.1 and then lastly 5,200 shares at the last key level at $23.4.
With only a capital of $100,000, you can purchase 9,100 DBS shares at an average price of $24.4 – this level is lower than had you purchased them without CFD.
Your initial margin stands at $22,217 and your margin requirement continues to be at 350% ((100,000 – $22,217) / $22,217).
2.) Buying At Critical Support Level
The USDSGD has been correcting in the past recent weeks since it hits a high of 1.353 a few weeks ago due to the massive stimulus bill passed by the Biden’s administration which gives way to rising inflation and devaluation of USD.
The Stochastics indicator is one of the chart indicators that you can navigate around on Phillip MetaTrader 5 – an oscillator that can help signal an overbought or oversold case scenario. An oscillator that hits above the 20 signal is likely to indicate that the tide is turning the other way.
The stochastics indicator is best paired with a trend identifier – something with the likes of the MACD crossover signal which shows the direction of the market it is moving towards to.
To illustrate the case, the MACD indicator turned up on the 19th Feb 2021 – signaling a change in the direction of the market. Together with the stochastics indicator signal, this trend continues upward for the next 6 days, and if you had bought the pairs, you would be able to make a maximum of 10 pips profits on the trade.
These critical levels are likely to yield a favorable risk-adjusted return in the long run given the impetus of the high hit rate.
Short-selling is a bearish strategy that involves the sale of a security that is borrowed and needed to be returned by closing the position at the end of the trade.
This strategy has been getting a lot of attention in the past few years as investors are looking to short over-valued companies and digital assets such as cryptocurrencies which has been gaining popularity recently.
For instance, there are many people who are bearish on cryptocurrency today because they do not think they deserved that sort of valuation in the market. Furthermore, the sharp rise is fueled by market hype from many speculators around the world. This hype can be seen from the 7-days Momentum signal and 5-days CCI which signals an extended overbought situation.
From time to time, there may also be instances where Hard Forks may result in increasing volatility which might spook the market.
With Phillip MetaTrader5, you can open a direct short position on Bitcoin and Ethereum if you are feeling bearish and would like to take advantage of such situation.
All of the above illustrations are my own formed opinions and strategies that traders and investors can undertake on the Phillip MetaTrader 5 platform.
With effect from the 3rd May 2021, you may also notice that all shares CFD on the Phillip MT5 platform have been resized to 1 share per lot. This makes it a lot easier if you are taking a position in larger cap companies such as Google, Amazon, Netflix and so on.
I also like the fact that most margin requirement for larger cap companies are at 10% while major indices such as Dow and Nasdaq are only at 5%. For Cryptocurrency however, they require a bigger margin requirement at 60% as they are much more volatile.
There is also a new batch lists of 23 ETFs which was launched recently on the 17th May 2021 which you may want to check it out.
For the full comprehensive lists of the CFD contract specification that is offered in the platform, you may refer to the link provided here.
Also, it is worth noting that at Phillip MT5 – you can further save on your trading costs by eliminating the fees (commission-free).
I’d encourage you to download their free Demo account in this link here and see if you like it.
If it is something that you like, you may register your interest and account by scanning the below QR code with your phone which they will direct you straight to the registration page on your mobile.
Feel free to let me know what you think of the platform, and/or how it helps you to strategize your positions better.
Disclaimer: This post is written in a collaboration with Phillip Futures. However, all opinions stated are that of my own, based on my experience and services received from Phillip Futures.