by , 02 May 2019

Q. "Hi Timon, I have R20,000 in my trading account and I'd like to take the Nedbank trade you sent through Red Hot Storm Trader.

How many CFDs would I need to buy if I only wish to risk 3% of my portfolio?"

A. You'll need three metrics to calculate the number of CFDs you'll need to buy.

We'll use the Nedbank trade specifics.

Metric 1: Entry price = R271.40
Metric 2: Stop loss price = R258.
Metric 3: Risk amount in trade = R600 (R20,000 portfolio X 3% risk).

Next we'll need to calculate the ‘Risk in trade’ which is the price difference between the entry and stop loss.

Risk in trade = (R271.40 - R258)
= R13.40

To calculate the number of CFDs you'll buy, you'll simply divide the amount you're willing to risk by the 'risk in trade'.

= (R600 ÷ R13.40)
= 44.7 CFDs

Make sure you always round down the no. of CFDs you'll buy, to prevent risking more than 3% of your portfolio.

This means, you'll buy 44 CFDs of Nedbank for this example.

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Q. “Timon what exactly is the difference if I buy 30CFDs of Nedbank versus 30 shares of Nedbank and what instrument will I trade with Red Hot Storm Trader?”

A. The quickest answer I can give you is that it costs a lot cheaper buying CFDs compared to shares.

With shares you'll pay the full amount of the share to own one Nedbank share.

For example: If you wanted to buy 20 Nedbank shares and the share price was trading at R270, this means you'll have to pay over R5,400 (20 shares X R270.

And this excludes the extra costs such as: brokerage, STT, IPL, STRATE etc...

With CFDs you'll pay a tiny deposit and you’ll be exposed to the full value of the share.

For example: With a gearing of 10 times, with Nedbank CFDs, you'll only pay R27 per CFD (R270 share price ÷ 10 times gearing).

With 20 CFDs you'll only have to pay R540 (20CFDs X R27 per CFD), and you'll be exposed to the full R5,400 worth of 20 Nedbank shares.

With CFDs you'll have more buying power compared to with shares.

But with great power comes more risk and greater reward potential. That's why you'll need to read through the free trading guide that I have sent all my Red Hot Storm Traders to help you master the science of money management.

“Wisdom yields Wealth”
Timon Rossolimos,

P.S: If you have a burning l trading or an investing question or you'd like to share your feedback about us, feel free to email me at timon@fsp.co.za and you'll stand a chance to be featured in one of the Trading Tips articles.

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