My CFD experiment failure

CFD trading: an honest account of my experiences with CFD trading and what I have learnt from the whole process and what others should know before they embark on such forms of investing.

I'm going to reveal one of my biggest financial failures to date. What I am about to reveal is a true account of how I made my first significant financial loss through stupidity and greed. I share with you hear because I originally set up this blog so that I would be honest and accountable for my financial transactions so that others may learn from my mistakes and successes, equally.

The Beginning of my CFD Experiment Failure

The instrument of my downfall was CFD trading, or Contract for Difference trading. I will delve deeper in to what exactly are CFDs in an upcoming post in the next month or two in series on Financial Products (so watch out for it!). I will try to give a decent explaination here of what CFD trading is. I say 'decent' because if I am truly honest with myself I cannot real off an explanation just like that (I need to use my notes and the internet) which just goes to show how stupid I was to invest. This in turn leads me to my first lesson:

Lesson 1: Don't invest in something that you don't fully understand

How do you decide if you fully understand it? Well you should be able to explain to someone (with no knowledge of the product) exactly why you are making the transaction, and I still cannot do this! Anyway, here goes my attempt (with a little help from Wikipedia):

CFDs are financial contracts between two economic agents (could be companies or people) that state that the seller will pay a difference between the current value of a particular asset (bond prices, share prices, foreign exchange prices) and its value at the time specified within the contract. If this difference is negative then the buyer pays instead tot he seller. So far so good? It all seems simple enough:
  1. Find a company share price that I had been following for a while
  2. Predict its future month share price
  3. Open a CFD contract to say that the value would go up
  4. Have enough money in the account for short term falls
  5. Make a couple hundred quid in a few weeks without much risk or effort

The CFD Transaction

I really like the company Weir Group and have actually held it in my stock portfolio before. In the past it has rose to over 2000 pence. From my value investing I made a nice profit on the share (about 20% in 6 months) and sold the shares to buy into Lonhro. This was back in January and in the meantime Weir Group share price has been hit by the current Eurozone debt crisis falling to 1765 pence. I thought this would be a great time to open up a contract predicting that the share price would hit 2000 again. I reminded myself that I should be greedy when the market was afraid and fearful when the market was greedy and proceeded to make the transaction.

In April 2012 I transferred £450 into a CFD trading account and set my limits so that I'd stand to make about £225 if the share price hit 1995. I also set limits to act as a precaution. I set a lower limit of 1365 so that I could lose almost £400 before the system would automatically close my trade. The share price had not been this low in over a year and I couldn't for the life of my consider that it would do so here.

The Second Big CFD Mistake

The second stupid mistake (after not fully understanding CFDs) was the fact that I did not fully read the small-print of the CFD transaction. This may have been because I was in so much of a rush to complete the transaction before the share prices rocketed back up again. As a result I did not realise that I would be charged £30 straight away for the privilege of risking my own money. Nor did I realise that I would be charge of about 15 pence every day that the contract was open.

Lesson 2: Make sure that you know what all the costs are

The CFD results

The share price went up a little to about 1800 before plummeting down to 1350 in less than two months. As I watched I constantly told myself to be patient and that the price would rise back up soon. I lost all my capital and at the end of the transaction withdrew £5.11 for all my stress and troubles. The great irony is that the contract was ended on 14/06/2012 by the 'stop' that I had put in place and yet the very next day the share price shot up 5% in response to some good banking news. Such is life.

Oddly enough I am not too upset by it all. In fact I am quite relieved that the whole ordeal is over. I did not enjoy the uncertainty of the whole process one bit. I really would never do it again. For someone like myself who really does not know enough about this financial product it really is like gambling. In future I intend to stick to investing in shares for the very long term.

Readers, do you have any similar investing horror stories that you berate yourselves still to this very day? What have you learnt from your experiences?

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Anonymous said...

I've come across some advice on CFDs saying to never leave the position open over weekends or public holidays, and to try only hold a position for between 1 and 5 days.

In hindsight, would you say this advice is accurate?

Mr. Moneybanks said...

In all honesty I don't feel that I know enough to be able to answer your question. However,I would point out that without serious training, experience, or insider knowledge, I believe that most people are ill equipped for this sort of trading product. When you start to look at 5 day positions - that seems a lot like trading, rather than investing, and unless you have the proper skills and set up, it seems unlikely that the ordinary investor will beat the traders at a game they play every day. My advice: steer clear of these sorts of financial products. They're dangerous when not fully understood.

Anonymous said...

I do know a great deal about this subject, having traded as a non-institutional trader for 15 years, most of which was in CFDs. 'Bottom line'is that most companies trade against you, that's why they have so many $100k p/a staff.
They win/you lose, or like myself I fought them for years, having never lost in a given month, but making much less than a wage throughout this time.
I can give volumes of details, but just know, when you begin to win off them, they monitor your every move, and have the advantage.
ADVICE! Get a job, start a business, restore cars, anything but dont bother with the crooked snakes at the bottom (ethically) of this industry.
Honest companies startup, and are soon after bought out by the crooked ones, so really, do something else, unless you are genuinely sadistic and self defeatist.

Mr. Moneybanks said...

Thank you for your clearly honest thoughts and insights Lloyd. Appreciate the comment

Anonymous said...

I lost $2400 in one night on gold leveraged up $1000 to a $500,000 position short. Then I logged in a week later and lost another $400 trading FOREX. Such is life!

Mr. Moneybanks said...

It happens! But we all learn our lesson...I hope!

Anonymous said...

it is always interesting to read on an issue which u are involved with. its been approximately 3.5 yrs since i got interested in this matter. i read books for a couple of months and then initially opened a demo spread betting a/c. after a month i got bored and then put in £5000 and opened an proper spread betting a/c. after a year and a half and with an actual account lose of £5, i withdrew the remaining £4995 from the a/c. all through this stages i had actually been learning the moves, reading books and whatever i could find on the internet. I then went back to the demo a/c and continued learning the technical analysis side of the story. i then understood where i stood in terms of spread betting and why they being market makers were not the right people for me. I then moved to learning more about CFD's, DMA and the actual costs involved in this process. I have in all these years kept a detailed diary of what all i have done to remind me of the odds and goods in this process. I have now opened a CFD a/c with DMA for the last 3 months with around £3000 capital. I have only opened 6 positions in these 3 months, and 3 of them suffered stop loss and 3 are still in trade. because i still believe i am learning, i only buy around 100 shares (£1 per point of rise or fall)to verify the costs etc involved and i can say that i am currently in profit but at a very low margin due to the limited amt of risk i have taken, as most of my profit is eaten up by the fixed commission costs, overnight financing costs, stock borrowing costs, guaranteed stop costs etc. having said all this i personally belive that if i am able to extend my purchasing power then there are considerable profits to be made, realistically i dont know as i have not placed large bets and do not know if the providers will then go against me. but as i also subscribe to a private provider of live charts n DMA i believe i am in a position to challenge any wrong doings from the provider. will i win or lose i dont know, as i said previously, i am yet to place those large bets, which honestly needs very large capital to which i currently do not have access............

Mr. Moneybanks said...

So it would seem that you are suggesting that if you are going to get involved in CFDs or Spreadbetting then you should have sufficient capital. Whilst that may be true I am not comfortable with the level of risk that CFD trading would involve. I still view it as a source of gambling. How can you know that in the short run that a particular stock or index will go up or down. I think I'll stick to investing for the long run. That way I can manage my risk better through portfolio management and searching for value that should reveal itself in the longrun.

Anonymous said...

Moneybank, it appears that now you are trying to defend your opinion. I do not dispute that it is a form of gambling but frankly most of the things in life are a form of gambling, e.g u take a mortgage on a home on the basis of a permanent job, well most of the so called jobs in the UK are not permanent after all, with a clause to make u jobless with a two month notice, even the soldiers fighting in foreign countries are not immune from this. Further no one can predict the market, not even the big gurus in this field, they only hav an opinion based on years of watching and assessing the markets. its all experience and learning, just like it takes years to become a specialist doctor or a lawyer or even a stock broker. i am clearly not defending this form of earning as i am myself not 100% confident, but i do believe that most of the economies are running on the basis of the stock market and there are people involved n possibly making money. if not then it would hav collapsed ages ago.............long run or short run, if u do not understand the market or if you blindly hav faith on a management company, u r surely gambling

Mr. Moneybanks said...

Anon - I think that you're absolutely right. If you don't understand the market or if you blindly have faith on a management company then you are purely gambling. This is definitely a motto that the readers of this post and comment feed should consider. However, I am not totally convinced that even with years of experience an analyst can confidently predict that the FTSE100 (for e.g) will go up by 200 points over the next month. But then again I suppose they only have to be right 51% of the time to make money. But by those statistics it is possible that there are plenty of people making money betting in this way who think that they know what they're doing but are, in reality, simply getting lucky and getting their bet right more times than they get it wrong. I'm not sure how you could prove my point (or yours) one way or another. But it's an interesting thought - do some people genuinely know what they're doing or are they luckier and simply because they have been doing this for longer, we credit their success to their experience?? Interesting.

Anonymous said...

I will agree and probably put a blind bet if someone no matter how experienced he is, could predict any market going up or down. its practically impossible because of the millions of investors involved with probably everone of them having a different view of the market. I cannot say of those who are lucky, because surely i hav not been, and whatever i have learned is through sheer hardwork, keeping records, spending considerable amount of time, both day and night and keeping tab of everything and anything, but believe me i still consider myself to be a naive. I am not sure if there are many people who are making money simply on the basis of luck, because then most of us would have been winning the national or euromillions lottery and the providers of the lottery would have gone bankrupt ages ago and this is certainly not the case. Going bk to my example last time, i entered 6 trades in the last 3 months with guaranteed stops in place (mind u after 3.5 yrs of struggle) and out of them 3 were stopped out at a loss of 50 points. on 1 i did not make any profit or loss. Out of the rest 2, 1 made me 49 points profit and the other is still trending at 600 points profit. Its just a reflection of what might go right after all this hard work and you really do not need to be right 50% of the time to stay in the market. Having said all, i am still positive as i have a diff source of income but would like to live a traders life if possible at all....

Mr. Moneybanks said...

I've enjoyed this discussion. I'd like to hear more detail about your experiences in trading. Get in touch if you'd like to write an article on the topic to go on this site. Email me at Let me know if you're interested.

Active Investor said...
This comment has been removed by a blog administrator.
Mr. Moneybanks said...

Thanks for the advice Active Investor. Can you explain your hedging strategy in a bit more detail. perhaps provide an example?

chris said...

I've been trading via IG Markets for last 18 months.I trade Ftse 100 cash. Wall St. Aussie 200 cash Micro. So I can start at 7.0am and trade continuesly through the whole day right till mid night as the markets open and close right around the world. Sometimes I wait weeks/ months until the markets have peaked at all time highs. Then you know they can do nothing except go down. And you go short for weeks as they go down.
Other times right on opening time I purchase say 5 units in each direction then put in a sell orders 20 points above and below. Later in the day as the market moves up and down, my orders are triggered and I make profits from both directions.
Sometimes right on opening time I place orders both long and short say 50 points above and below the opening price. And I place closing out orders say 75 points away on both at the same time. And usually during the days girations I make money.
Another thing to watch is that sometimes Wall st rocket up like a skyrocket, 100's points in a minute. I quickly place a large order when I think its peaked. then in the next minute as it returns to ground level I make money.
Another way which is called 1, 2, 4. You wait until you think its ready to go down and You go short one unit. But if it goes up (against yr hopes) after 50 points you go short 2 units, and if it still goes against you another 50 points you go short 4 units.
By then usually it must turn down and you sell the 4 units for profit and sale of the other 3 units are all extra profit,
Also usually first thing on a Monday morning the Aussie goes up, up!!
And on about 1 out of 3 Friday evenings the Ftse crashes and if yr ready waiting you can make big monies.
Start really small and careful ($1 units will only outlay $25 of margin). Only risk about 2% of yr kitty on each purchase.
To be really safe only trade shorts all the time and hardly any longs. Because can drop big time suddenly and really catch you out. Where as it hardly ever goes up suddenly in a really big way.
In closing. IG's working platform is amazing. I really love it compared to all the others I've tried.

Mr. Moneybanks said...

Wow Chris! This is pretty detailed. Thank you so much for your comment. It'd be interesting to know what your background is considering you're clearly knowledgeable about trading? What do you think your overall profit has been to date?

Mr. Moneybanks said...

A particular thank you for all these tips for other readers. However, I doubt whether I'll be CFD trading/ Spread betting again any time soon.

Anonymous said...

this is an extremely ignorant story, in life there are always win or lose. You can put the money in the bank if you think it is safe there. There are so many factors that may contribute to success or failure. you lost money in your trading, but at the end of the day, who cares? there are always winners and losers in the financial world, where do you think people's profits come from?

If you are saying this is gambling, you are misleading people. Anything you do can be gambling. I can invest long time in physical stocks and if I know nothing about it, it is still a gamble.

Please actually be educated before you post something online.

Euro said...

Ignorant would be if I did not know what I was talking about like you are doing with probability. Of course there is a risk in everything but there is the probability or the chance of the event happening. So you if you buy a stock in a solid company the chance of it going under is say 95/5. The unpredictability of the stock or index value over a short period of time is totally unpredictable and one loss can wipe out 20 wins, couple that with the pressure of leverage and your chances are now in the region of 25/75 against you. While true I have not bothered and do not have the inclination to waste my time in calculating the probability of success in this game my experience tells me its stacked high enough to make it gambling.

Anonymous said...

Just found this blog.

Unfortunately I have a horrible tale....

I started with placing £250 into my +500 account 6 weeks ago. I made a bit, up to £700 within a week but learn't pretty quickly that placing loss calls 'too safe' wasn't always the best idea as when trading Brent Oil or something equally as volatile on a daily basis, it regularly would move into a loss before shooting back up into profit. This wiped my account out.

Convinced I'd cracked it, I placed £1000 into my account and started again.

I made a few mistakes and learn't as I went but after another week I was on a good roll. I ended up making £500 a day.

This went on when 2 weeks ago I was making £1000 a day, then losing £2000, then making another £1000-3000 simply by playing the same methods out but with larger trades.

As this was working, call it greed if you like but I eventually invested £10k of my hard earnt savings into my account and continued on trend. I ended up as of last night £18k (£8k in profit) in little over 2 weeks of trading. I honestly thought at this rate I'm going to be moving house and driving ferrari's within a year!

I took a hit last night as Oil rose up and broke the up trend we've seen the last 2 weeks. I thought 'that wont last, it'll crash again in a moment.'.

I left it overnight and still, I was losing about £2k. In hingsight, I should have taken the loss and walked away for a few days until the commodity settles.

My loss continued into this morning. I lost £6k.
I chased my loss, and bought into it instead of going short. The trade hit a massive fall so my buy was ALSO wrong and lost me an instant £3k. I thought that was it, it was now falling after all so I went short again..... I loaded up my last £10k and went big on a short. Brent Oil just shot up again before crashing once more.

I've lost £22k.

Don't know what to do, if I'll ever trade again. Today, next week. Ever. I feel sick.

Mr. Moneybanks said...

Hey Anon, that's a truly scary story and I should know. I've been there! These products shouldn't be available. Full. Stop. A thought occurred: would you like to write anonymously about your experiences? If so, just fill out the guest post section of the site (bottom of the home page) to get in touch. Same goes for anyone else on this comment thread who'd like a cathartic experience in warning others off CFDs. Feel free to get in touch.

Unknown said...

I agree 100% that you should not use a product yo don't fully understand.
your paragraph:
I'd stand to make about £225 if the share price hit 1995. I also set limits to act as a precaution. I set a lower limit of 1365 so that I could lose almost £400
Tells me a lot right there. You were risking more than you were potentially going to gain. trading like this is a sure fire way to lose all your money. you should be aiming to lose 200 to gain 400.
So often I see stories of people losing so much money trading cfds.
And without fail it is due to a basic lack of understanding of risk managemaent.
Here are the basics.
Your CFD acc is $10000 pounds , whatever.
You are willing to risk 2% of your $10000 at most on a trade .[very important ]
2% of 10000 is 200. So you are willing to lose no more than $200
You like company xyz . It is currently at $5.00 and you think it may go to $6.00
You decide that your STOP LOSS ORDER [ AUTOMATIC SELL ORDER]always use one. will be at $4.80. This is usually determined by a strategic location on a price chart .
So $5.00 - $4.80 is .20c
Now you divide your $200 risk by .20
This give 1000. That is the amount of share you buy, 1000
So you buy 1000 at 5.00 and immediately put a sell order on for 1000 shares at $4.80
If the shares drop to 4.80 you lose your $200.if they go to $6.00 you make $1000. I'm out of room here . I can continue if you like

Unknown said...

So. We now potentially stand to gain $1000 for a risk of $200
This is a ratio of 5:1 or what is known as a Profit to Loss[P/L]
Often I see comments that you only need to be correct 51% of the time to profit when trading.This is absolute BS.
If you on average have a profit to loss ratio of say 2:1 [this is achievable] you only need to have a winning trade % of 33.33% to break even over time. If you have 40% winning trades you will be in profit!!
Lets do the math:
100 trades in a year. Risking $100 per trade.[risked $10000]
You get 34 Trades right and 66 Wrong.
your winning trades on average make $200 profit
Your Losing trades on average lose $100
34 winning trades x $200 = $6800 profits
66 losing trades x $100 = $6600 losses
So with 34% wins we make a profit of $200.
Lets try 40% Wins
40 wins x $200 = $8000
60 Losses x $100 = $6000
so with only 40% wins we make $2000 Profit after risking $10000 over the year.
Lets try 50% win Rate with 2:1 P/L Ratio
50 x Wins At $200 = $10000
50 X Losses at $100 = $5000
Profit = $5000 or 50% of $10000 risked