QA: How to calculate the return on a CFD?

I have been a subscriber to your newsletter for a few months now, but have not entered into a trade yet, as I need to upskill myself on the trading of a CFD.

Based on the information provided, I have tried to recalculate your profit predictions, but I need some guidance as I think I might be missing something. I am assuming that the difference in many calculations and what you are predicting might be due to the amount that you invest (perhaps?) and the risk taken per CFD.

I have used your figures provided in your newsletter dated 18 February 2025, in which you suggest a buy of FirstRand CFDs. With an investment of R10,000 and a risk per trade of 2%, I have calculated that I can trade 24 CFDs. Based on these figures, I calculated that I will make a profit (without fees, of course) of 73.15%, which is more than half your prediction of 167.12%.

Please see below the figures I have used and the result that I get:

I would appreciate it if you could guide me in identifying what I am missing.

Let’s break it down.

Firstly, the profits reported are percentage based so, while risking 2% of account capital (or R200) on an account balance of R10,000 may be a little bit small to trade efficiently, it will make no difference to the calculation.

The most important information in every email can be found in the “trade specifics”. The really crucial information is found in the SMS that accompanies the email. For the Firstrand (FSR) trade on the 18th of February 2025 I sent the following:

NEW TRADE

Here are the trade specifics:

I will be buying (going LONG) FirstRand CFDs

Symbol: FSR.XJSE.CFD
Side: BUY
Order Type: Limit
Validity: GTC
Entry: R72.30
Stop loss: R64.00
Take profit: R85.00
Margin: R7.60
Risk: I’ll be risking R8.30 per CFD contract at stop loss. I will make +167.21% if I trigger the take profit.

All your calculations above are correct other than line A12 and A13, which is creating the total return being +73.152%. Here you’re multiplying the geared profit by 24 CFDs twice.

The way that I am calculating the return is based on the capital outlay required.

1. In the case above you are assuming 24 CFDs traded. No problems there.

2. The margin per CFD is R7.60. Correct.

3. Therefore the total margin required (or money that will be reserved from your R10,000 balance) is R182.40 or 24 CFDs x R7.60.

4. Your profit is correctly calculated on 24 CFDS at R304.80. Remember, a Contract for Difference (or CFD) pays you the difference between your buy price and your sell price. So if you hit take profit at R85.00 you will be paid the difference between your Buy Price and your Sell Price i.e. R85.00 – R72.30 = R12.70. You multiply the R12.70 by the 24 CFDS for the total profit i.e (12.70 x 24 = R304.80). You have this correct.

5. At this point your R182.40 margin is released back into your account and you realise the R304.80 profit.
Thus you’ve made R304.80 on capital deployed of R182.40.

You get the profit of R304.80 plus the principal of R182.40 returned to your account. Essentially you have invested R182.40 and the investment has returned R304.80.

So, the profit will be R304.80 (profit) ÷ R182.40 (capital deployed) = 167.11%

(I see there was a small typo in the tenths column of the email but please don’t kill me for one tenth of one percent. We do try to get the emails and SMS’s out as quickly as possible, so our proofing is not always perfect!)

The error you seem to be making is that you’re multiplying the geared profit of R304.80 by 24 CFDs for a second time (to get to R7,315.20) and then dividing this by your account value. In the case above the total account value isn’t relevant other than determining your chosen trade size.

I’m well aware of the 2% rule so many traders espouse. You need to think about it in the context of your overall portfolio. In the example above you’re risking 2% of your trading account if the position was to hit stop loss. There’s nothing wrong there, but it’s ultra, ultra, ultra conservative. Usually a 2% risk is in the context of your total portfolio rather than at an account level. I prefer to think like this: Don’t put more than 2% of your total portfolio into a trading account.

The issue with risking only 2% of a R10,000 account is that I will very seldom run more than 5 trades simultaneously. In the case above, even if you’re putting R200 per trade on margin, you will never be using more than 10% of the capital in your account. That means R9,000 of your account will at all times be sitting dormant in cash (often even more if we’re only running two trades). Deploying only 10% of your trading cash means a lot of dead money in the account. While most CFD accounts pay a decent interest rate (because a portion almost always sits in cash to ride out market volatility) you would be better off by withdrawing the funds and deploying them elsewhere into a higher yielding money market fund for example.

My typical rule of thumb is that you should never have less than about 30% of a geared trading account on margin, while also never more than 70% of the account deployed. Ideally, by doing this, you’re managing your cash float effectively. If you’re managing your account between these levels it means you’re not so conservative as to sit on dead cash (that misses out on lower risk opportunities elsewhere), but not so aggressive that your portfolio can’t handle the margin calls if the world really goes pear shaped.

Of course, I don’t know your personal situation, but on a R10,000 account, risking two percent, you would need to be running almost 25 concurrent trades to avoid the opportunity cost on the cash, and could potentially run up to 50 trades if you were really running the account hot.

For my own trading I always focus on the total exposure of the trade in the context of your whole portfolio. It’s usually helpful in understanding the real risk I’m taking on a position. In the example above you’re buying exposure to 24 Firstrand shares via the CFD. In other words, at R72.30, your total exposure to Firstrand is R1,735.20 (R72.30 x 24). That means if you trade 24 CFDs on Firstrand, and the Firstrand bank goes bankrupt the next day (and all stop losses fail), you will lose a maximum of R1,735.20 on your trade. That’s the real MAXIMUM risk. You cannot lose more than that (and that situation is extremely unlikely).

The 2% rule always sounds reasonable, and new traders often cling to it as it sounds like a reasonable safety net. But, if you think about your trading in terms of your absolute exposure then there is nothing to fear. For me the absolute exposure always puts the risk in context. So many traders will build up a multi-million rand share portfolio but, understandably, become overly conservative when it comes to their trading simply because they’re not sure of the real risk they’re taking. It’s difficult to divorce your the amount you’re willing to risk on an active trading account from your overall investment portfolio. R10,000 is a lot for some, and a little for others. But once you understand the real risk behind CFDs in terms of the exposure you’re taking, you can more reasonably decide if R10,000 in a trading account is too much (in which case definitely apply a 2% rule to your trading account value) or if you’ve already compensated for the higher risk, in a new investment class, by only allocating R10,000 to your trading account.