This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, June 2019). All views expressed in the article are the independent opinion of DollarsAndSense.sg
Desmond Leong is the CEO of both The Forex Army, a platform for forex traders to come together to trade the forex markets in a live trading room, and Everest Fortune Group, an award-winning research house that specializes in combining fundamental and technical analysis to accurately forecast the Forex, Indices, Commodities and Energy markets.
Desmond started The Forex Army in 2016, to provide a platform for people to discuss trading in a structured manner guided by proper professionals. For many traders, the live trading room and trading tools are useful for not just discussions but also for making successful trades.
As a trader, Desmond’s style of trading leans towards scalping and day trading, focusing on very short-term trades. We previously sat down with Desmond to find out more about his trading community and how he runs two different companies in the trading space. He also shared 8 valuable tips for young, aspiring traders that are hoping to become full-time traders.
Last October, IG launched Knock-Outs, a product that is new to the Singapore market. We decided to tap on the experience of a professional forex scalper Desmond, to get his insights and opinions on this new product.
DollarsAndSense (DNS): What were some of your first thoughts about this product when it was launched?
Desmond Leong (DL): I thought that the additional leverage it provides was a nice reward for people who have good trade management. It also forces people to think more about the risk aspects of trading, versus just the reward side which is all too often the main point of focus.
DNS: How would you describe this product to a new trader in your live trading room?
DL: Knock-outs are a limited risk CFD which has an in-built mechanism to limit how much a trader can potentially lose on each trade. When price hits a certain loss level for each knock-out trade, the trade will automatically close the position.
In the case of IG’s Knock-Out product, based on the above, an Investor/Trader can open a position of the underlying instrument by:
- buying a ‘BULL Knock-Out’ if they think price is going to rise higher / stay bullish
- buying a ‘BEAR Knock-Out’ if they think price is going to drop lower / stay bearish
DNS: Could you give us an example of how this works?
We first start by choosing the underlying instrument with which we want to trade. We will use EUR/USD as an example.
Figure 1. Selecting Knock Out Product
We can open the Knock-Out menu by the selection menu on the left-hand side. Clicking on the “Knock-Outs” tab will open a long list of FX, Indices or Commodity counters. For this example, we have selected the EUR/USD KO.
Figure 2. Selecting Directional Bias
Having selected our instrument, we can then do our analysis on IG’s interactive chart. For this example, having done our analysis, we believe that price will rise higher. I would then select the direction of the Knock-Out in which I want to enter. In this case, the BULL “Knock-Out”. (In a Bearish case, it is the exact opposite)
The picture below breaks down and explains the features of what is seen on the trading interface. Having selected the BULL “Knock-Out” option, this is what we see:
Figure 3. Features of a Knock-Out (KO) Trade – Bullish Case
Explaining the Features:
- EUR/USD Bull KO AUG-20 – This tells us the name of the underlying, the directional trade we are taking and the expiry of the KO trade. If the price did not reach our Limit/Take profit by August 2020, the trade will automatically be closed at the current market price. It could be a loss or profit.
- Knock-Out Level – The trader MUST remember to select this in the right-hand side of the panel before the trade is opened. According to IG, the position is guaranteed to be stopped out if the underlying IG price reaches this level. It cannot be edited once the position is opened.
- Knock-Out premium – According to IG, this is based on the risk in the underlying market. It is possible for the value of the premium to change while a position is open. The premium is included in the spread. So, it is paid when a trader opens a position. But the trader will receive the premium back if he/she chooses to close the position before the KO level is triggered.
- Trades executed at Market – KO trades can only be opened at the current market price. Trades cannot be opened as “Pending” positions.
One thing to note here would be the price level for EUR/USD looks very different from the spot price offered by IG. At the time of writing, the SPOT FX price given by IG is 1.10100 EURUSD. However, we note that the price for the EURUSD Knock-Out is 11010.0. (We believe that this is due to IG’s calculation. But on the surface, it seems to be just a change in the decimal placing).
Figure 4. Knock Out (KO) Trade – Bearish case
DNS: Recently, the foreign exchange margin increased from 2% to 5%. How do you think it will affect traders and how can Knock-Outs possible help?
DL: With the new MAS regulation increasing margin from 2% to 5% for all forex trades by retail traders, it would then mean that accounts being margin called would be a more common occurrence. With Knock-outs (KO) trades, traders would already know beforehand the maximum loss their trades would take and can plan accordingly if they have sufficient funds in the account to meet the margin requirements. Because of this, traders (and IG) know the exact margin allocated to each trade and that effectively allows you to trade with higher leverage.
DNS: What are some of the clear strengths and weaknesses you see with this product?
DL: IG’s Knock-Out products are good for anyone who is looking to trade the markets (Forex, Indices and Commodities). However, it would be most beneficial for those who are new to trading. The KO feature is especially essential for new traders as it helps to instill a good discipline of always setting a guaranteed ‘Stop Loss’. When real money is involved in trading, most traders, even experienced ones, will still have to come face to face with their emotions. Behavioral and cognitive biases kick in and depending on the situation, a trader may choose to widen his/her ‘Stop-Loss’ levels instead of sticking to their original trading plan. Thus, having a KO feature that can only be selected once will help protect the position and also build the discipline of sticking to one’s trading plan.
There are some downsides that I observe for this product. The KO trades can only be opened at market. This means that in a bullish scenario, the trader would be unable to wait for price to retrace before entering at a better price. The trader would have to just enter at market. Also, I think the pricing of the KO products might be confusing for novice traders.
DNS: What kind of products do you think Knock-outs would be ideal for?
DL: In assets such as indices, equities and commodities, gaps are more common as compared to FX. This is due to pre-market price auctions where trade volume can build up and lead to a sudden jump or drop in price. Even a protected trade with a stop loss in such a situation would be rendered useless if the price jumps across the stop loss. Here is where we see the benefit of having a KO price. If prices were to gap higher (in a bearish scenario) above the KO level, we would be assured that our position will be closed, and we will take only a loss that we are comfortable with.
DNS: Will you consider using knock-outs for your own trades in the future?
DL: Definitely, particularly for scalping. One of our most profitable strategies is scalping and that usually requires really high leverage since the lot sizes are incredibly large (we balance it out with tight stop losses and profit targets). However, none of the MT4 brokers factor this in. It’s nice that IG recognizes that there are some people might need this who have good trade with the right risk management strategies, and hence, allow them to essentially trade with higher leverage through knock-outs.
Knock-outs: A Good Way For Traders Who Are New To CFD Trading
With Knock-Outs, traders do not have to worry about losing more than their initial margin or losing more money during market slippages, where we get a different price than the expected market price when we execute an entry or exit from a trade.
It’s important to remember that Knock-Out trading is by itself just a tool that can be utilised for trading. Ultimately, whether you are profitable in your trades over the long-term will depend on how familiar you are with the products that you are trading – forex, indices or commodities – and how refined your trading strategies are.
If you would like to open a trading account so that you can start trading Knock-Outs in Singapore, you can open an account with IG today or start with a demo account that gives you $200,000 virtual credits for you to practice.
To learn more about alternative ways such as knock-out trading to access the market beyond Forex, you can download a free eBook published by Bloomberg about trading.
IG provides an execution-only service. The information in this article is for informational and educational purposes only and does not constitute (and should not be construed as containing) any form of financial or investment advice or an investment recommendation or an offer of or solicitation to invest or transact in any financial instrument. Nor does the information take into account the investment objective, financial situation or particular need of any person. Where in doubt, you should seek advice from an independent financial adviser regarding the suitability of your investment, under a separate arrangement, as you deem fit.
No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of the information. All forms of investment carry risks. Trading in leveraged products such as CFDs carry risks and may not be suitable for everyone. Losses can exceed deposits.
This article has not been reviewed by the Monetary Authority of Singapore.