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Monday, 14 April 2008

How To Lose Money Quickly

Over the last couple of months I have been trading actively in the stock, indices, commodities and Forex markets using a type of investment product called Contract For Difference (CFD). You probably have heard of this as it has become very popular recently.

When you use a CFD you basically trade the underlying asset (e.g. shares, indices, commodities, forex) without physically owning them, which means you make a profit or loss from only the difference between what you buy the asset for and what you sell them for.

CFD products (outlawed in USA) are very highly geared. You could easily leverage you trading position by 20 to 50 times (which also means your risk also increases by 20 to 50 times). If you had only $500 to trade, for example, you could effectively take a $10,000 position in a CFD of a blue chip stock (that is, effectively take out a $9,500 loan to trade).

Due to the high leverage of CFD products, any small change in the price of the underlying asset will translate into a big change in your trading position. If you are on the winning side of a trade, you will make a huge profit and are laughing; but if you are on the losing side, you will make a huge loss that can send you broke and at the same time lose all your hair.

I haven't lost my hair (yet), but I haven't been doing great with CFD trading either since starting out in February with $2,000 in my trading account. As of today, it is worth only $500. The markets which I traded in were highly volatile and so small adverse changes in my trades led to big losses. In the end my trading account wasn't big enough to allow more room for price fluctuations or set bigger stop losses.

So from my experience, unless you absolutely know what you are doing with CFD trading, it is very hard to make money consistently. You need to spend a lot of time monitoring, researching and analysing the underlying asset for each trades. Otherwise, avoid CFD trading until you fully understand the risks and have enough time for it.

I will suspend my trading activities for a while and pursue other strategies for making money in the quest to become a millionaire by 2018.

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