Becoming a Successful CFD Trader

Trading the Right Things with CFDs

CFDs offer the big advantage of being able to trade things that might not move quite as much as some other things, but due to the huge amount of leverage that CFD traders enjoy, this realty doesn’t matter.

A lot of traders will spend a lot of time trying to be in the hottest stocks, and to the extent that they are successful, they can take advantage of more volatility then, say, trading an index would provide.

Trading indexes offers several advantages though, and they tend to be more predictable and also offer more liquidity than stock trading. More than anything, trading an index allows for a more simple approach, as well as the opportunity to become much more familiar with the asset traded.

It is just crazy in fact for a CFD trader to trade stocks, especially when they can trade indexes and other assets commission free, unless they get to the point where they have so much money set aside to trading other assets that they are just saturated and they have hit the trading maximums in them.

We’re talking accounts in the millions here though for this to come up, and if you did want to then add stocks, you should be wondering whether the attention that you’d need to devote to trading them would not detract from your other trading results. It actually very likely would.

For those who do want to trade stocks, if you can only get 4:1 or 5:1 leverage with stocks, but can get several times more with an index and still trade it safely, this should not be a difficult decision. When commissions are accounted for, stocks simply don’t measure up for CFD traders, especially those with more modest sized accounts.

Forex trading can also provide both stability and all the leverage you can handle as well, and the stability part is a lot more important than most people think. It’s one thing to see something move but often another to have it move in a way that is predictable. With big leverage, predictability actually matters more.

Establishing a Trading Advantage

Once we have selected what we’re looking to trade, we then move to coming up with plans on how to take advantage of the movements of these assets. Needless to say, this is not such a simple matter, but the main goal is to be in something when it’s more likely to go up than down and on the other side when it is more likely to go down than up.

Assets do move with certain amounts of momentum in both directions, and the key is to look to separate the meaningless movements that are just part of a bigger move from that which suggests a reversal of the move.

Probably the best way to learn how to do this is to look at past charts and look to figure out a set of rules that would have you on the right side of the trade more often than not. Once you find a strategy that does that, in other words once you come up with a profitable plan, then you can look to refine the strategy to be on the right side for even more money and be out even more for smaller losses.

Various indicators and other means can be used for this, but what we want to pay particular attention to is the strength of the move, the speed of it in other words, and we haven’t really come up with a good indicator to measure this properly yet. There are some momentum indicators that can but to make them sensitive enough they will end up being too choppy.

It is better to start out simple, such as using things like moving averages to start, where we’re not just looking for the average to increase, we’re also looking at the rate of the increase, where higher rates will produce more vertical movements.

One of the best indicators out there and one that hardly anyone uses is the trix, where we can adjust the length of it to suit the timeframe and the behavior of what we are trading. This indicator is nicely simple and also very smooth, two qualities that really need to be highly valued by learning traders, and even experienced ones.

When the slope of the trix reverses, that’s your entry/exit points, not when it drops below the line and changes color like the way most people use it. Doing so will produce signals that are way too late, and while it’s fine to let the momentum turn, you don’t want to wait too long here.

There are other indicators that can be used successfully by newer traders, but we should be looking to use as few as possible and also use ones that are going to produce clear trading signals.

Signals aren’t going to be right all the time and the best you can shoot for is finding ones that make more money than they lose, but when you get there, you are entering the kingdom of successful traders, a kingdom that most traders never even glimpse.

Individual CFD traders have some big advantages over larger traders such as banks, funds, pension plans, and even bigger traders, but only if they learn the craft enough and apply this knowledge. You can be in and out of positions in a flash but you have to be in and out at the right times.

Getting to the Next Level

All this needs to be done with at least one eye on risk. It is mighty nice to be able to accelerate what would otherwise be some pretty boring returns and take them to where you can double your money several times in a year, but this power needs to be respected, as it can hurt you as well if you’re not careful.

Having a successful trading plan, one that has a positive expected return over time, is not enough, as we still need to worry about the outliers. Trading is a lot like poker, where you can be the best player at the table but still get a run of bad hands, and you have to be able to handle this potential downside.

There are actually three main things that successful traders need to check off to be successful, and a lack of just one of them can spell failure. We need to have a sound trading plan, we need to execute the plan properly, and we need to be able to handle streaks of bad luck so to speak and minimize the damage that these runs can do.

If we flip a coin and we know that the coin is rigged to come up heads a little more than tails, and we’re always betting on heads, we still might see a run of tails, and in fact we will at some point. If we bet too much, a run of tails can put the hurt on our account balance, and this is what we need to avoid.

It is important therefore to manage both the leverage we use and the amount that we are trading with, in order to protect us enough against these bad luck events. It’s not that trading is random in any way, but there are going to be times where our trading strategies are going to suit a particular time in trading and other times where this will be the case less, and we’re going to have to deal with both situations well.

Most successful traders will tell you that their primary goal is not to win so much as to protect themselves against losing, and this is why they are still in the game making money, because they have been able to accomplish this well enough. The ones that haven’t, well you just don’t hear about them because they are gone.

CFD trading can be very rewarding, and the best thing about it is how accessible it is to get started with very modest amounts of money, but the road to success is indeed a journey and you will be passing a lot of dead bodies on the side of the road. By understanding what you need to do, you’re much more likely to stay on it.