by Helmut Schmidhofer
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CFDs (contracts for difference) facilitate highly leveraged positions in shares, commodities and financial instruments. Margin requirements from 3% to 20% of the entry price are not uncommon.
The following spreadsheet calculates the optimum position size from seven input values you supply...
Many good texts on risk management recommend to risk no more than 2% to 3% of your trading capital on any one trade. A risk amount of $250 is based on an initial capital of $10,000.
You would increase the risk amount as your capital increases but may decide to hold it at that fixed level if your capital decreases.
The program calculates the estimated loss if the position is stopped out and divides that into the risk amount to return the position size.
In the given case (margin amount $1.00 and loss $0.63) the size of 393 contracts holds until the account balance falls below $643. At that point the size is reduced so that the position does not attract a margin call unless slippage is underestimated.
It should be noted that the commission is expressed as a percentage of the position value at entry and closure. Most brokers charge a fixed $ amount below a certain threshold (in the given case, $7 below $7,000 and 0.1% above $7,000). If you were to enter 0.1% when the total position value is below the threshold you would be underestimating the loss, resulting in a slightly larger number of CFDs.
The percentage when brokerage is fixed is a function of the position size, which is a function of the percentage. This is a circular side calculation. First you enter the correct commission percent (0.1% as given).
If the side calculation shows a revised percentage, enter it until it no longer changes.
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