CFDs vs Vanilla trading account for a rookie
Sup Monkeys
Im currently a student in the UK looking to open my first real trading account. Ive been paper trading for a few years on a website that offers straight equities, cfds and forex on the FTSE 100. Ive noticed Ive developed a preference towards CFDs, (i know the classic assumption would be that like every rookie I like the apparent 'ease' of returns that leverage provides, which I am trying to be wary of with very tight risk limits) but I think I also find it easier to trade within the time scale and risk profile offered by CFDs as my trading ideas tend to be small 'sure' price moves that if they dont materialise I close out the position and CFDs allow me to better capitalise on them.
Onto the meat of the issue, I currently have a £7000 ($11000) trust fund that matured a few years ago and I want to use as my capital base for taking my trading live. I have been doing this and will continue doing this purely to learn and develop my market intution/understanding, any financial benefit that if/may arise is an added bonus. Obviously I would not ideally like to blow up spectacularly and lose all that money but I am fully prepared and accept the risk that I will probably lose a good chunk of it in the long run.
My question is whether with such a capital base would you guys recommend I pick a CFD or a straight equities/bonds/etfs account, ideally I would have picked one that offers both but there seems to be quite strong separation between them with UK retail brokers, and I would rather not split an already small capital base. Essentially do you think that trading straight long only with no leverage will teach me more market rigour/discipline(???) in the long run rather than chasing high risk CFD trading because of the ease of leverage or do you think it would be better for me to start a CFD account and that I wont be able to extract meaningful returns from my trading ideas (even if they are correct) with no leverage on such a small capital base. Just to make it clear I am more interested in shorter term trading rather than longer term investing, or else my choice would have been easy to make.
Would really appreciate and am interested in hearing any opinions/advice as Im really not sure whether my perceptions as a noob are completely off base, please correct me on anything ive said wrong/misunderstood !
Not sure if the UK exchange has dark pools and off market exchanges but if i had that kind 'quid' to play with, i'd skip out on equities and trade currencies instead and open up a CFD only account. Do you want to be a trader or an investor is the real question?
Im like you..I want to speculate.. i dont give a fuck about where the asset is going, I just want to know when so i can get on the other side of it ;)
Longterm aim is to be a trader, thats why I want to get my feet wet and try and develop market intuition, get acclimatised to the risk/stress as much as I can (although I understand its no where near the same as having a sizeable position in the market compared to a few k)
Also what do people think about covered warrants vs CFDs, the equities/bonds etc account that excludes CFDs allows for covered warrants, are they a good instrument to cut my teeth with ?
Leverage amplifies your gains, but also amplifies your losses. The only point of trading retail with leverage is when your capital base is so small that any gains you make would be offset by commissions. Or when trading FX because you will probably be trading EURUSD where you are not going to get more than 5 pips on a trade. With that capital base you should be able to trade without leverage without getting killed by commissions. Basic logic says that you will not make money, at least at the beginning. So if you are going to lose money you are going to lose more trading CFDs (probably A LOT more). It's very likely that what you consider tight risk management is more risk than any professional trader would take. CFDs will also charge you for any overnight positions, and no matter what some "speculators" tell you, traders also hold overnight positions. You might want to have something for more than a week, which would be quite normal. Having that possibility should be important to you. If you day trade it doesn't matter if it's equities. I mean, if you make an average of 4 bps a day and trade 252 days a year you would roughly make 10% on the year, and you should be more than happy with that.
My point is if you want to do this for the education you should be playing defense, so IMHO you shouldn't be trading with leverage with that capital base.
Thanks so much ! This input is exactly what im looking for, my current risk plan on paper trading is 5% of capital base on any single idea with not more than 4 or 5 ideas going on at any one time, and a hard rule of getting out if 50% of the margin gets wiped out (so CFDs im currently on £160,000 and will put up to £8000 which is leveraged to 80k with 10% margin on any idea with a rule to get out if I lose more than 4000 on any trade, using an example because im not sure if my percentage description gave the accurate idea), its kind of self developed so I dont know if I am way off, too tight etc or if it would translate effectively to a non leveraged cap base. As you said im trying to play it really defensively so I have as many shots as I can to have bad trading ideas and learn but at the same time I dont want any good idea I have to not be evident because I got killed on commissions or the move was tiny and yes I most definitely hold positions overnight or even for a few weeks so it only hit me yesterday that with the financing rates I get on overnight positions (LIBOR+3%) on CFDs its an absoloute killer, so I think its becoming clearer to me I will go for the non leveraged acc.
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