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The hidden cost that can slowly eat away at your portfolio

by , 10 June 2021
The hidden cost that can slowly eat away at your portfolio
“I read a trading quote the other day:


How do u evaluate the feedback if you followed all the setups, entries take profit and stop loss requirements?
 
I think a trader will have difficulty with emotions when entering another trade if he or she can’t find a reason as to what went wrong with the losing trade.”
 
A. The feedback is not seeing what went wrong but rather, reporting on whether you followed your system according to your trading journal and statistics... For example, if a trade hits your stop loss, you report on the feedback by asking a couple of question…
 
1. Did I lose the 2% or the % that I expected to lose following my risk management rules?
 
2. Is the market now going to present a short sell opportunity that the trend has changed?
 
3. Is the market in a favourable environment or do I need to lower my risk in the future, as I am taking a number of losses lately...
 
All feedback needs to be objective rather than subjective with your trading strategy...
 
If you find you’re feeling emotional with taking a loss then it means the feedback you’re reporting is based on doubt.
 
Either you:
 
Don't have a proven system to back track on.
Are risking too much in each trade, that is hurting your portfolio.
Are new to trading a real account and losses are something you’re not used to...
 
But over time, the feedback you’ll learn to report becomes more mechanical, statistical and a way of life to analyse your trading performance rather than question your motives...
 
I hope that helps… Make sure you read this again, when you are feeling emotional with your trading…
 
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“Hi Timon,
 
I have a broker account with Rand Swiss. I see that there are charges for ‘swaps’ on all my buy (long) trades.
 
For instance, Anglo American is at -6.31% charge.
 
Could you please explain how this works and how we can limit these charges?”
 
A. Hi Harry,
 
As you’re buying CFDs, it means the instrument is geared and there are daily charges with CFDs.
 
The charge is known as a ‘daily swap’ or ‘daily interest charge’.
 
This is seen as a hidden cost that can slowly eat away your portfolio, if you treat your trades as investments… (I’ll explain what I mean shortly).
 
With your Anglo American example, the margin (initial deposit) is 25%
 
In other words, you’ll deposit 25% of the value of the share price and the CFD provider (Nedbank in this case) lends you the other 75% of the funds.
 
And with CFDs, you’re borrowing the money from the bank. This means, you have to pay interest on the borrowed funds.
 
Those are the ‘swaps’ we’re talking about.
 
On ProTrader or Velocity Trader, you can find this rate by going to where it says under ‘Symbol info’:
 
 
 
 
 
 
So if you buy R100,000 of AGL, you’ll need to put down R25,000 (25%) and Nedbank will lend you the other R75,000.
 
On that R75,000, you’ll pay 6.31% (R4,732) interest (swap) per annum.
 
But you don’t have to worry about paying this full amount, if you are only holding for a short period of time.
 
Each day you hold the CFD with exposure of R75,000 – you’ll only pay R12.97.
 
(Exposure of your trade * 6.31%) ÷ 365 days.
 
If the price moves up, the exposure value goes up which mean you’ll pay slightly more.
 
If it drops in value, you’ll be charged less accordingly.
 
However, as traders we don’t tend to hold for more than a couple of days or weeks.
 
Unfortunately, we cannot avoid these fees. But you can limit them by holding onto your trades for a shorter time. I have a 35 days maximum trade holding policy, which limits the interest that I pay per trade.
 
If you plan to hold a trade over a longer period of time, then I can only suggest you buy shares (equities) which do not have a daily interest ‘swap’ charge. You can buy shares from a broker like Easy Equities.
 
Trade well, 
 
Timon Rossolimos,
Analyst, Red Hot Storm Trader  


The hidden cost that can slowly eat away at your portfolio
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