While researching our article on short selling Bitcoin, we came across a CFD provider called Plus500. We opened an account, and deposited $200 Australian Dollars. We wanted to play with real money (they also offer an excellent demo account), and this was an amount we were willing to lose. CFDs are highly leveraged, and we are of the opinion that it is possible to lose your entire account balance if trades go against you.
There are many CFD providers, we decided to use Plus500 because:
- Opening an account was fast and easy - we were trading with the complimentary deposit within minutes
- They offer high quality easy to use apps for both IOS and Android. Being able to trade from a mobile device is a major advantage. Plus500 have kept their apps simple. This means that it is easy to place trades and monitor your account from any mobile device. Most of our trades were done using the Android app from a Samsung Note 4 Phone
Living in Australia, we see a lot of news coverage about the Australian Dollar. Skimming the headlines it is common to see something like 'The Aussie Dollar continues to fall because...', or 'The Aussie Dollar makes serious gains due to.....'. It gets a lot of publicity, we've often wondered if it was possible for everyday people to invest in the value of the Aussie Dollar.
We expected that investing in Foreign Exchange, would involve expensive brokers, with high minimum deposits. Something not overly attractive to web bloggers with only $200 to put at risk. When it comes to investing a comfortable sum in the market of your choice, Plus500 is the perfect platform. We were able to gain leveraged exposure to the Aussie Dollar, with minimal fees.
If you are familiar with the world of derivatives, CFDs are most similar to Futures. You can invest in an underlying asset in either the short or long direction, then you are marked to market.
After 3 days of 'playing the markets', we are astounded with the results. It was nothing more than beginners luck, and if we tried again, we are just as likely to loose it all. The table below shows our results trading the AUD/USD Contract for Difference through Plus500:
The results we achieved are made possible because we are trading CFDs. There are two main advantages to trading with CFDS:
1. Market Exposure - Despite being located in Australia, I can easily invest in international shares, commodities, foreign exchange and a whole lot of other markets. Investing directly into these markets as an individual, would be very difficult, specially if they are overseas or require large sums to open an account. CFDs provide a way to access these markets even if you only want to risk a small amount of money
2. Leverage (click for TFG definition) - The borrowing side of CFDs is very similar to how a margin loan works. The interest on the loan, is built into the daily premium. The leverage available varies depending on which instrument you are looking at. In the details section of each CFD, you will see a leverage ratio. A leveraged exposure means that your returns are magnified. Both losses and gains are increased substantially due the effects of leverage. This means that there is a substantial increase in financial risk.
Plus500 expresses prices of CFDS in the form of a buy sell spread. At the time of writing, the spread on the AUD/USD CFD was 1 pip, and the CFD price was; Sell: $0.7928, and Buy: $0.7928
The only fee charged by Plus500, is a maintenance fee, which is expressed as a percentage, and charged once a day at a predetermined hour. Plus500 expresses this in your own local time. For the AUD/USD instrument, the buy premium is 0.0190%, and the sell is 0.0160%. The premium is charged daily at 6:00am (in our local time)
The leverage ratio offered on the Aussie Dollar CFD, is 1:200. This means that for every dollar deposited, Plus500 will allow us to invest $200 on the forex market. This means that even though we only deposited $200, we now have the power to invest up to $40,000 in the Forex market.
Our deposit of $200 could have been use on a single trade worth $40,000, but we decided instead to play with the minimum trade value of $5,000. This was part of our risk management strategy. For each CFD, Plus500 has a maintenance margin. This is the amount you need to have on deposit with them in order to keep a CFD trade open. For our $5,000 AUDUSD contract, there is a maintenance margin of $12.50. If our available funds starts to fall towards $12.50, Plus500 will send out and alert, telling us that we are approaching the minimum margin (by email or SMS). If your available balance drops below the $12.50 minimum, Plus500 will automatically close the trade.
Plus500 offers you leveraged exposure to several markets, however they are not a credit provider. You need enough funds on deposit to meet your minimum maintenance requirements, or they will automatically close your trades. Some may find this frustrating, but we think that it is a great risk management feature. It means that Plus500 will not allow you to lose more than you have deposited with them. The only funds at risk, are those you choose to deposit with them. This is a great way to control your exposure to risk. We did not want to risk more than $200, so that is all we deposited.
We had $200 on deposit, but only put $25 of it into our initial trades. This meant that if the market moved against us, we'd have plenty of funds to absorb the movement (our losses would grow, but the trade would not be closed). It also meant that if we closed at a loss, we'd have funds left over to trade again.
This strategy became useful towards the end of our first day, when we had four Contracts open (and were risking $100). The market had moved against us, but rather than close the trades at a loss, we left the trades open until the next day. After a few hours sleep, we awoke to find that there had been an announcement by the ECB, and the Aussie had fallen sharply. The four trades were all looking pretty good. The table of all our trades is shown below, the four in question are in green:
Just under 65% of our gains were made while we were asleep. We did not expect the ECB announcement to have such an impact, hey we didn't even realize it was due. This was nothing more than pure luck. We could have woken to discover that the trades had been closed and our deposit had was now less than $50. It was a risk we were willing to take because we knew that the most we could lose was the $200 which we agreed to put at risk.
You know how we love playing with photoshop, so here's a chart we made showing our returns trading the Aussie Dollar with Plus500 CFDs
If you are interested in investing in Forex (or commodities or indices or international shares, or even Bitcoin), then we suggest you have a look at Plus500. Even if you are not ready to put any real money in the account. Plus500 has a great demo account, which gives you full access to all their trading facilities, and lets you test your strategies with hypothetical money.
If you do decide to deposit some of your own money, please remember that your funds are at risk. Do not deposit money you can't afford to lose. Our experience in this example has been very positive, but we are not professional traders. We will continue to play with CFDs, and in a future post, you may read how we lost all our funds.