Avoid CFD Mistakes (FPMarkets.com)

AVOID COMMON
CFDMISTAKES
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This educational material is prepared for general guidance only and does not constitute financial
product advice, nor does it take into account your investment objectives, financial situation or
particular needs. Features of the product including fees and charges are outlined in the Product
Disclosure Statement available from FP Markets’ website www.fpmarkets.com.au and should be
considered before deciding to deal in FP Markets derivative products. Derivatives can be risky;
losses can exceed your initial payment. FP Markets recommends that you seek independent
advice.
FP Markets has made every effort to ensure the accuracy of the information as at the date of pub-
lication. FP Markets does not give any warranty or representation as to the accuracy, reliability or
completeness of the information. . Examples included in this material are for illustrative purposes
only. To the extent permitted by law, FP Markets and its employees, officers and contractors shall
not be liable for any loss or damage arising in any way (including by way of negligence) from or in
connection with any information provided or omitted or from any one acting or refraining to act
in reliance on this information.
FP Markets Pty Ltd ABN 16 112 600 281, Australian Financial Services Licence Number 286354.
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Overview
Some mistakes are simply that, mistakes. They
can be made by anybody. Even the most seasoned
professionals have been known to accidentally
buy instead of sell or trade the wrong quantity or
even the wrong security from time to time. These
mistakes can generally be avoided by exercising
the appropriate level of care.
Most other mistakes are the result of either a
lack of preparation, knowledge or discipline on
the part of the trader. Having the ability to avoid
making these mistakes will improve your chances
of developing into a successful trader.
While it is wise to learn from your mistakes, it is
even better (and considerably less expensive) to
learn from the mistakes of others. By outlining
some of the most common mistakes made by CFD
traders, we hope that you will be able to avoid
making the same mistakes.
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Contents
Misuse of Leverage 5
Not Understanding the Impact on your P&L 6
Incorrect Position Sizing 8
Poor Trade Management 9
Not Understanding the Instrument Being Traded 11
Using the Wrong Order Type 12
Using an Inappropriate Strategy 13
Not Learning How to Use Your Trading Platform 14
Not Taking Responsibility for Trades 15
Trading for the Wrong Reasons 16
Over-Trading 17
Psychological and Emotional Mistakes 17
Not Understanding the Suitability of CFDs 19
Summary 20
Want More Information on CFDs 21
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Account
Value
$10,000
$10,000
$10,000
$10,000
Margin
5%
10%
20%
50%
Leverage
Factor
20:1
10:1
5:1
2:1
Maximum
Exposure
$200,000
$100,000
$50,000
$20,000
Misuse of Leverage
One of the major advantages of CFD trading is
the ability to trade on margin. Instead of
outlaying the full face-value of a transaction,
CFDs allow a trader to take the same position
with an outlay of just 10%, 5%, or even less of
the face-value. Despite a smaller commitment of
capital, the trader still acquires exposure to the
impact of price swings for and against the full
face-value of the trade. This gives CFD traders a
greater exposure than can be achieved by
trading, for example, traditional, non-leveraged
securities.
One of the major advangtages of CFD
trading is the ability to trade on margin.
A CFD trader trading on a margin of 10% can effectively leverage
their trading funds by a factor of 10. If trading products on a
margin of 5%, leverage of 20 times is available. This would mean
that a trader with a $10,000 trading account could be controlling
positions with a face-value of $200,000, or even more if lower
margin rates are available. This is shown in the table below.
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One of the major
advantages of CFD
trading is the ability
to trade on margin.
Despite the smaller
commitment of cap-
ital, the trader still
acquires full exposure
to the impact of price
The potential for
profit is greater, but
so is the risk.

Many CFD traders look only at the extra buying
power that leverage makes available to them.
They make the mistake of ignoring the fact that
leverage is a double-edged sword. Despite only
outlaying a fraction of the face-value of a trade,
the CFD traders account balance will move up
or down based on the full face-value of the posi-
tion. This is fine if prices move in the anticipated
direction. If trading a CFD where the underlying
asset is a security on a margin of 5%, a price rise
of 1% in the underlying security could deliver
gains against the CFD position but it could also
result in a loss of 20%. If CFD traders overlook
this feature of trading on margin, they risk
making the mistake of taking on too much risk.
Not Understanding the
Impact on your P&L
Closely related to the misuse of leverage is the
mistake of not understanding how a particular
trade will impact your profit and loss. Because
of the substantial leverage that is associated
with CFD trading, seemingly small outlays can
result in large moves in the overall profit or loss
of your CFD trading account. This can take some
traders by surprise.
Consider a CFD priced at $2.40 that trades on margin of 5%. If a trad-
er wishes to buy 10,000 of these CFDs, the outlay will be just
$1,200 as an initial margin ($2.40*10,000*5%). With this relatively
small investment of $1,200, the trader will be controlling a position
with a face-value of $24,000.
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100
10
$1,000
$10,000
$0.01
$0.01
$0.01
$0.01
$1
$10
$0.10
$100
On a position of this size, a price move of one cent will have an impact of $100 on the
overall account balance e.g. CFD price increases $2.41 then face-value now $24,100.
The simple way to calculate this is to multiply the number of CFDs by the smallest
movement in price. This is calculated using the following formula:
CFD position size x Minimum Price Movement = Dollars per point
If you opened a long position in the above mentioned CFD at
$2.40 and the price increased by $0.12, you would have made an
unrealised profit of $1,200. However, if the price of the CFD fell
by the same amount, you would have an unrealised loss
of $1,200. Although these moves represent a 100% gain or loss
in respect to the initial margin outlaid, the overall impact will
depend on the size of your total account.
For a trader with just $1,500 in their account, a trade that results
in gains or losses of $100 per $0.01 of price movement will clearly
have a massive impact on the overall P&L.
However, if the same trade were taken by a trader with $40,000
in their account, the relative impact would be much smaller.
A loss of $1,200 on a $1,500 account would see 80% of the ac-
count wiped out. However, a loss of $1,200 on a $40,000 account
would reduce the overall balance by just 3%, which is clearly
more acceptable.
Traders should be aware of both the impact of a one-point
($0.01) move in the CFD they are trading and how this relates to
their overall account.
Traders should be aware of the impact of a
one-point move in the CFD they are trading.
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Small outlays can
result in large moves
in your overall profit
and loss.
The overall impact
depends on the size of
your total account.
A loss of $1,200 on
a $1,500 account
would see 80% of
the account wiped
out. However on a
$40,000 account this
represents a much
smaller loss.
CFDs
position size
Price
Movement
Dollars
per point

Incorrect Position Sizing
To avoid taking on too much risk through the
misuse of leverage, it is important to develop a
strategy for calculating the appropriate size of
your trading positions. Many CFD traders make
the mistake of simply trading right up to the
maximum size available with their leveraged
funds. This is often done without any regard for
the amount of risk exposure that such a position
generates.
There are a great many methods available for calculating appro-
priate position sizes. However, the more successful ones tend to
start with the trader determining what they personally regard to
be an acceptable level of capital risk for any single trade if it were
to go against them. Traders then calculate a position size that
meets these criteria.
For example, consider a trader who decides to restrict losses on
any given trade to $200. If this trader wanted to buy a CFD at $1.40
with a stop-loss at $1.15, the amount at risk would be $0.25. The ap-
propriate trade size would be determined by the following formu-
la:
Maximum Risk Amount / Risk Per CFD = Position Size
$200 / $0.25 = 800
The method outlined above is typical of a method known as
Fixed Fractional position sizing in which a certain percentage of
the overall account balance is risked on each trade. Because many
traders elect to risk 2% of their account on any one trade, this
method is also often referred to as the ‘2% Rule’.
A slight twist on the Fixed Fractional method is the Volatility
based method of position sizing.
This technique also uses risk as a certain percentage of the over-
all account balance on each trade, but the level of risk per CFD is
based on a measure of volatility, such as the Average True Range
(ATR). Using this methodology, a trader will take larger positions
when volatility is low and smaller positions when volatility is
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It is important to
develop a strategy
for calculating the
appropriate size of
your positions.
The more successful
methods involve the
trader determining
what they consider to
be an acceptable level
of capital risk for any
single trade.

For example, a trader with a $10,000 account might decide to risk
2% of the account on any given trade, or $200. If the buy price is
$1.40 and the ATR is $0.20, the stop might be set at 2*ATR, or
$1.00. The quantity to trade would therefore be $200 divided by
$1.00, or 200 CFDs.
Other methods of position sizing include allocating a fixed dollar
amount of equity to each trade, buying or selling a fixed number
of CFDs of each trade or varying the size of each trade according
to overall profitability.
Many traders make the mistake of not
closing poorly performing positions
quickly enough. One tool that makes
this easier is the stop-loss order.
The diligent use of a suitable position sizing strategy will also
help you to avoid the common mistake of placing all of your eggs
in the one basket. Nearly everybody knows that it is unwise to
place all of your funds into any single investment and yet people
continue to make this most basic mistake, thus exposing their
account to significant risk.
Poor Trade Management
While traders frequently commit an inordinate
amount of time to selecting, planning and ex-
ecuting new positions, they often make the
mistake of exiting these trades with much less
thought. This is unfortunate as it is the exit, after
all, that will determine whether a trade has been
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This is where the traders’ enemies of hope, fear and greed make
an appearance. It is human nature to grasp quickly at profits (due
to greed) while the fear of incurring a loss will see the same
trader leaving poorly performing positions open in the hope that
prices will move in the desired direction and reduce losses or
even see them turn into profitable trades.
There is an old saying among traders that you should, ‘Let your
profits run and cut your losses short’. In other words, if you have
a profitable position, you should allow that trade to achieve
its full potential, rather than closing it out at the first sign of (a
small) profit. On the other hand, if you hold a position that is mov-
ing against you, you should move quickly to exit that position,
before the loss becomes too great.
If you are managing your trades correctly, your average profit-
able trade should be considerably larger than your average los-
ing trade. Once you have the discipline to trade in this way, you
should be able to achieve overall profitability even if only half of
your trades are profitable.
Many traders make the mistake of not closing poorly performing
positions quickly enough. One tool that makes this easier is the
stop-loss order.
Once you have identified a price level that corresponds with the
level of risk that you are willing to take on a particular trade, a
stop-loss order can be placed at this level to automatically close
out the trade. This removes the human element from the exit,
reducing the risk that the emotion of hope will interfere with
rational trading decisions.
It is important to understand that a stop-loss order simply pro-
vides a trigger point for the execution of an order. If a sell stop
has been placed on a long position, the stop-loss will be activated
if price trades at or below the nominated stop level. From time to
time, this can result in trades being executed at a price that is less
favourable than the nominated stop-loss price. This is known as
slippage and can arise when prices “gap”.
Many traders make the mistake of not closing
poorly performing positions quickly enough.
One tool that makes this easier is the
stop-loss order.
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The exit position
determines wheth-
er a trade has been
profitable or not.
Rather than closing a
trade at the first sign
of profit allow the
trade to achieve its
full potential.

Instrument Being Traded
Being over-the-counter products, there are a
great many differences in the specifications of
contracts available as CFDs. If you are trading
these products, it is your responsibility to know
what these specifications are.
For example, what exactly does 1-CFD of this underlying security
represent? Is there a physical underlying security? Is there an
expiry?
What if you still hold an open position at expiry? Is there a
financing fee? Can it be sold short? What are the trading hours?
Which currency is it priced in?
Speaking of currency, have you considered the impact that
movements in the AUS could have on your holdings? Do you
have a currency overlay strategy in place to dilute the impact of
adverse currency movements? If the AUS gains against the
currency of the country that you have invested in, any gains
you might achieve in that foreign position will be eroded. Even
worse than that, if you have incurred a loss on your foreign
position, a weakening AUS will amplify this loss.
By far, the majority of traders invest in CFDs where the
underlying equities are listed in their own country. This is
known as ‘home country bias’. The simple reason for the
existence of this phenomenon is that traders are more
comfortable trading CFDs on underlying securities that they are
familiar with. How well do you really know the market
conditions in the USA or Asia? How well do you know the local
conditions and regulations of those foreign markets? Is it
really convenient or practical for you to sit up for half the night
to trade a CFD where the underlying security trades on an
exchange on the other side of the world?
Sometimes, it might be better to stick to CFDs based on markets
that you are familiar with rather than venturing off into markets
you don’t fully understand.
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Know your product,
there are a lot of
differences between
specifications of
contracts available
for CFDs.
It can be a good idea
to stick to CFDs based
on familiar markets.

Using the Wrong Order Type
Trading with real money should be viewed as a
serious business. As such, you should take the
time to ensure that you thoroughly understand
the most basic tools of the business. Many CFD
traders have missed opportunities or closed out
of trades at the wrong time simply by placing
the wrong type of order. At the very least, you
should understand the following order types.
MARKET ORDER
Used to execute a trade at the current price.
STOP ORDER
To exit a trade, place a stop order at a level that is worse than
prices currently available. On a long position, the stop-loss order
to sell would be placed below current prices. Conversely, on a
short position, the stop-loss order to buy would be placed at a
level above current prices.
LIMIT ORDER
To exit a trade, limit orders are placed at a level that is better
than the current price. When seeking to lock-in profits on an
open long position, a limit order to sell would be placed at a
level above current prices. If seeking to lock-in profits on a short
position, a limit order to buy would be placed at a level below
current prices.
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Don’t miss an
opportunity; make
sure you are familiar
with all the order
types.

Using an Inappropriate Strate-
A common mistake among traders involves using
an inappropriate strategy, or worse still, having
no strategy at all.
Using some type of strategy on a consistent basis, even a simple
moving average cross-over system, provides a framework of disci-
pline for the trader. This is generally going to deliver better results
than a haphazard approach or the use of a constantly changing
series of strategies.
Some care must be taken when selecting a strategy. It would be a
mistake to attempt trading a strategy based on five minute charts
if you are unable to access your trading platform for much of
the trading day. Similarly, it would be a mistake to use a strategy
based on monthly charts if your trading horizon is measured in
days or weeks.
People tend to hold a belief that a more complex system must be
a better system. This is especially true among certain groups of
traders. They develop systems that employ huge numbers of
inputs and require extremely complex calculations & algorithms.
They often produce charts that are so heavily covered in indica-
tors that it becomes difficult to see the price action. While some
of these complex systems certainly can be profitable, the more
inputs and calculations they require, the more potential there is
for something to go wrong.
In many ways, a simple strategy is often better (and easier to fol-
low with confidence) than a more complex system.
One of the tools employed by many strategies is the short trade.
This is where a trader sells a CFD that they don’t currently hold in
anticipation of buying it back again at a lower price
in the future. While it can be argued there is little difference be-
tween taking a long position or a short position, the short posi-
tion may not be appropriate for a highly conservative trader.
In theory, a short position holds much greater risk than a long
position. This is because of the difference in the maximum poten-
tial adverse excursion for each type of trade. With a long position
in a CFD where the underlying asset is a security, the worst possi-
ble move would be for the underlying security to fall to zero and
become worthless.
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Select an
appropriate
strategy. This will
provide you with a
framework for
discipline.

For a short position, where losses will mount as prices rise, the
maximum adverse excursion is theoretically unlimited. While
holding a short position in a CFD where the price of the
underlying security is skyrocketing is unlikely, it is a possibility.
Accordingly, it might be considered a mistake for a highly
conservative trader to trade on the short side, especially without
a stop-loss order in place.
While some complex systems can be
profitable, the more calculations they require,
the more potential there is for something
to go wrong.
Not Learning How to Use
Your Trading Platform
It is hard to imagine that a builder would get far
without learning how to use his tools, or that a
surgeon would have happy patients without
learning how to use her tools. Yet many traders
throw up their arms claiming to be ‘comput-
er illiterate’ and ‘no good with technology’ and
somehow still imagine that they will be success-
ful.
Sure, there is a steep learning curve involved when trading on a
new platform. But coming to terms with this and putting in the
effort to get beyond any lingering fears of technology is essen-
tial if you are to become a successful online trader.
It is no good waiting until you have open positions and the
kets start moving before you figure out how to place
a stop-loss or take-profit order. You need to ‘know’ how to
around the platform and open, close or adjust orders without
having to look up the user guide.
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It is essential to know
your trading platform
if you want to be a
successful trader.

FP Markets provides access to a range of educational tools that
outline the features and functionality of webIRESS .
in-house platform demonstrations, webinars over
platform walkthroughs to ensure you feel comfortable
webIRESS before you start trading. For more
fpmarkets.com.au.
You should also prepare for more extreme situations. Consider
what might happen if your internet connection were to fail or if
your computer became infected with a virus and was not operat-
ing at its peak.
You need to know how to move around the
platform and open, close or adjust orders
without having to look up the user
guide.
As a safety measure, it is wise to keep your CFD provider and ac-
count manager’s phone number written down (in hardcopy) near
your computer.
It is also good practice to keep a list of your open positions so
that you know what your exposure is.
Not Taking Responsibility
for Trades
While most traders keep a keen eye on their open
positions, there are those that make the mistake
of not doing so. By frequently checking on your
open positions you will know what your overall
exposure is and whether you are in profit or loss.
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In addition to errors, some traders simply forget that they have
placed certain orders, or through unfamiliarity with the plat-
form, find that they have accidentally placed orders without
intending to do so. It is best to detect these mistakes as quickly
as possible by monitoring your open positions.
Mistakes made when entering trades are more common that you
might think. Traders frequently hit buy instead of sell (and vice
versa) or enter the wrong quantity or even the wrong ticker sym-
bol. These are simple mistakes that are often put down to having
a ‘fat finger’. However, if you take your trading seriously, you
should ensure that you exercise the appropriate level of care.
If you are trading to make a profit, it is
important that you approach your trading
in a serious, business-like manner.
Trading for the Wrong Reasons
Most people undertake trading with the goal of
making a profit. However, there are some people
that participate for entertainment, either con-
sciously or unconsciously.
If you are trading in order to make a profit, it is important that
you approach your trading in a serious, business-like manner.
People that trade for entertainment, or to impress their friends,
will be lucky to break even, let alone make a profit.
Be careful not to make the mistake of viewing yourself as a
serious trader if, in fact, you are just seeking entertainment.
fpmarkets.com.au
Make sure you are
in the market for
the right reasons.
Approach trading
like you would a
serious business.

Over-Trading
Another important mistake to avoid is the temp-
tation to over-trade. This is a greater risk for trad-
ers that are not following a
predetermined strategy.
Sometimes, choosing to sit on the sidelines until a clear trend
emerges is in itself a valid strategy.
Traders should also avoid the mistake of consistently trading fully
leveraged positions just because they have funds available. Each
trade should be considered on its own merits and within prede-
termined risk parameters.
To avoid the possibility of being exposed to such a dire (if unlike-
ly) outcome, it is important that you do not trade with money
that you cannot afford to lose. You can also lose more than your
account balance.
Sometimes choosing to sit on the sidelines until
a clear trend emerges is in itself a valid strategy.
Psychological and
Emotional Mistakes
Making money requires a trader to place trades
that are ultimately ‘correct’ and deliver a profit.
Because of this, many traders develop the mind-
set that they must be correct on every trade.
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If you cannot accept the fact that you may have been wrong on a
particular trade, you will find it hard to close out of a losing posi-
tion. Instead, your mind will find ways to convince itself that you
may yet be proven correct and the trade may swing around and
profitable. There is a risk that subconsciously, you will
see evidence that supports want you want the
while becoming blind to evidence that suggests you are wrong.
If you can accept that you won’t get every trade right and that
you don’t actually need to get every trade right, you will be in a
much better position to manage your trade effectively.
Being wrong is something that we are conditioned from a young
age to feel bad about. Instead, we are taught through positive
reinforcement that we should feel good (and even self congrat-
ulatory) about being right. This can present serious problems
when trading.
By frequently checking on your open positions
you will know what your overall exposure is and
whether you are in profit or loss.
If your losing trades cause excessive emotional distress, you will
find it difficult to analyse the market rationally. There is a danger
that you will start over-trading in an effort to make back losses
or to ‘get even’ with the market. This is likely to place you in an
even worse financial and emotional position.
On the flip-side, profitable trades can generate feelings of elation
and invincibility. If you make the mistake of allowing this
emotion to take hold, you may find yourself taking excessive risk
or making silly mistakes through carelessness.
Where possible, you should aim to keep your trading related
emotions under control. Using a tested and proven strategy can
help you minimise mistakes associated with emotion.
Another mistake that is common among traders is the desire to
focus only on positive outcomes. People tend to start thinking
about how they might spend their potential profits, while
ignoring the downside risks. Wiser traders will focus on the
downside risk potential of each trade and will make sure that
this is within their predefined parameters.
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It’s ok to be wrong,
accept that you
won’t get every
trade correct.
Emotional distress
can cause a trader to
chase a loss, this will
make it difficult to
analyse the market
rationally.
Evaluate all the
potential risks before
placing a trade.

Suitability of CFDs
In order for this model to work we need
to know three things; our entry price,
our exit price & our available capital.
The ability to trade CFDs has greatly improved
the trading opportunities for a great many trad-
ers. They are an ideal trading vehicle for traders
with a relatively short-term time horizon and a
desire to increase their exposure
on a given level of available capital.
They may not be so suitable for traders with a
horizon due to financing charges which can build
Similarly, traders that are unable or unwilling to
open positions manage their trades might find
not suitable for them.
No matter what your reason for trading, you need to pay special
attention to the amount of money that you allocate to your trad
account. What would your financial situation be if you were
to lose the whole lot
Finally, anybody considering adding CFDs to the trading tool-
box should make sure that they understand the risks associated
with this product. As with any financial product, the risks will be
significantly higher if you don’t take the time to understand the
product. For further information on the associated risks of trad-
ing CFDs, please refer to the Product Disclosure Statement avail-
able from our website at www.fpmarkets.com.au.
fpmarkets.com.au

Summary
In summary, the key to avoiding mistakes is to
be aware of the environment and situations that
cause them. By putting in the effort to under-
stand the mechanics and terminology of CFD
trading and knowing how to use your trading
platform you will be able to avoid many of the
most common mistakes. Most of the others can
be avoided by taking care when placing and
amending orders and keeping your emotions in-
check.
For traders that do understand how CFDs work and learn to mi-
nimise the associated risks, there can be substantial benefits.
Through the utilisation of leverage and the convenience of online
trading, short-term traders now have greater opportunities than
at any time in the past.
Short-term traders now have greater
opportunities than at any time in the
past.
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Want More Information
on CFDs
FP Markets offers access to a wide range of
complimentary trading tools and resources.
Visit www.fpmarkets.com.au for more information.
Our DMA CFDs deliver REAL Transparency, Reliability and Trading
Value. Access a wide range of Australian Share CFDs from just
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FREE DMA CFD DEMO
Get REAL CFD experience with a FREE 14 day demo. Visit www.fpmarkets.
com.au or call 1300 376 233 for more information.
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Should you have any questions or enquiries,
please don’t hesitate to contact FP Markets.
Level 5, Exchange House 10
Bridge Street Sydney NSW
2000
T 1300 376 233
F +61 2 8252 6899
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